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Global Food Markets (Subject) / Everything... (Lesson)

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• Drivers of concentration in the agricultural input sector Firms can increase their market share either by 1. Expanding their sales faster than the industry average or 2. Acquiring or merging with other firms in the industryFirms can expand their sales faster than others in the industry by:1. Offering better products or services (research and development)2. Improving their marketing ability3. Offering lower pricesReasons for mergers and acquisitions vary by industry, but they include market forces and the emergence of new technologies. Government policies can also affect the ability of firms to compete in markets and their incentives (motives) to merge with or acquire other firms.Factors driving changes in market structure by industry:1. Crop seed and biotechnology sector: the major driver of consolidation was the emergence of biotechnology. Companies sought to acquire relevant technological capacities and serve larger markets to share the large fixed costs associated with meeting regulatory approval for new biotechnology innovations.Factors driving consolidation and concentration:1. Acquisition of complementary technology and marketing assets2. Economies of scale in crop biotechnology research and development2. Agricultural chemical sector: has been heavily affected by changes in government regulations that were regulating the health, safety, and environmental impacts of new and existing pesticides: larger firms fulfilled better these stricter regulatory requirements than the small ones.Factors driving consolidation and concentration:1. Stricter environmental safety regulations2. Rise of generic products3. Farm machinery industry: many of the major mergers and acquisitions were because of the large financial losses of major manufacturers during periods when the farm sector was in recession. This substantially reduced demand for farm machinery. Firms experiencing large financial losses are often vulnerable and more attractive for acquisition.Factors driving consolidation and concentration:1. Financial losses of major manufacturers during farm-sector business cycle (which strongly influence demand for large capital purchases)4. Animal breeding sector: vertical integration in the poultry and livestock industries enabled some large firms to acquire capacity in animal breeding as part of their integrated structure.Factors driving consolidation and concentration:1. Vertical integration of poultry and livestock industries2. Economies of scale in animal biotechnology R&D5. Animal health sector: this sector is largely a byproduct of mergers and acquisitions in the pharmaceutical industry, as most of the leading animal health companies are subsidiaries of large pharmaceutical companies.Factors driving consolidation and concentration:1. Spillover from consolidation in the human pharmaceutical industry, which is being driven by loss of profit streams and idled capacity when major drugs go off-patent
• ABCD The four big commodity traders: Archer Daniels Midland (ADM) – USA Bunge – USA Cargill – USA Louis Dreyfus – FranceThe ABCD companies are so dominant in the bulk commodities sector (especially in soy and palm oil) that they actually decide what producers will grow, where, how, in what quantities and for which market. They do this by providing inputs and other services directly to farmers, and by securing the sale of those products.The ABCDs have been also involved in offering health care to US producers, providing mortgages for farm workers to buy mobile homes, and working with chemical and seed companies to promote particular technology packages to farmers.High – volume bulk tradeThe commodities in which the ABCDs specialize are produced and traded in large volumes, though frequently on low margins. The profitability of trade in these commodities depends not just on world prices, but also on factors such as freight rates, currency exchange rates, and ownership of infrastructure, as well as governmentpolicies related to export credits, aid policies, subsidies, and tax policies.The price of grain on world markets is of course important to them, but they can profit regardless of whether prices are rising or falling – what is important to them is to maintain the high volume of trade.Focus on “ingredient” or “input” commodityThe large commodity trading houses focus their activities on commodities that are not typically end products in themselves, but rather serve as inputs to processed food, animal feed, biofuels production, and industrial processing. These commodities – including palm oil, soybeans, wheat, and maize – are unspecialized andgeneric, and can easily be substituted for one another.The nature of this business is servicing other industries and a lot of ordinary consumers do not have any contact with ABCD.Transportation, storage and logisticsTrading in bulk sets a number of highly detailed logistical, storage, transportation, and delivery challenges.These involve significant planning and management tasks, including the transportation of a variety of (sometimes perishable) products by land and sea, and the planning and tracking of shipments.Flexibility in ways of landholding and sourcing of raw materialsAs originators, access to land is a key factor for the ABCD companies. Decisions concerning access to land depend on a variety of factors, including local laws regarding ownership of the land, labour issues, the cost of land, etc. The main means by which the firms access land are:1. Contract farming;2. Contract or supply agreements with large-scale agricultural producers/plantations;3. Land leasing for direct production or sub-contracting;4. Land ownership for direct production or sub-contracting;5. Any combination of the above.Active engagement in shaping the regulatory contextThe large commodities trading firms are able to perform considerable control and influence over the regulatory context within the agri-food sector. They do this through a number of channels, including direct lobbying with governments, placing former staff in key decision-making roles in government, and hiring former governmentofficials to lobby on their behalf. The companies spend a lot of time and money on influencing public and political debate on trade, production, and investment regulations at the domestic and international levels.The big firms also work with others in the industry to set private standards for the commodities in which they deal. For example, each of the ABCD companies is an active participant in the Roundtable on Sustainable Palm Oil (RSPO).Active risk and financial managementThe trade in all commodities is characterized by a high level of risk. Any number of factors – natural disasters, crop failures, political or economic shifts – can affect the prices of commodities, which may be locked into a long supply chain. While prices can change quickly, commodity traders are dealing with a physical stock that is large, expensive to store, and harvested only at certain periods of the year.The level of risk and volatility in the trading of products pushes the companies to look for strategies that will increase their stability and predictability. The finance and risk management divisions of the ABCD traders are huge and absolutely central to their businesses.The companies trade in futures markets on their own account and on behalf of others. They also use hedge funds and other financial tools to manage risk and increase their returns.
• Activities covered by the ABCD. Cargill is the biggest of the ABCD companies, as well as the largest private company in the USA. Cargilloperates across a wide range of commodities, products, and services around the globe. Considering ABCDcompanies Cargill is the biggest company with the largest sales, profit and number of employees (in 2013,Cargill had the profit of 2.31 billion $ and number of employees was 142.000).Commodities: Soybeans/Oilseeds, Palm Oil, Corn, Wheat, Cocoa, Sugar, CottonProcessing: Farm products/services Storage and Transportation Investment and RMMilling grains Fertilizers Elevator/Storage Financial ServicesOil crushing Seed Sales Transportation Farmland acquisitionProcessed food Contract FarmingAnimal feed Farmer Advice ServicesBio-fuel production InsuranceMeat, poultry, eggsArcher Daniels Midland (ADM) it is the world’s third largest processor of oilseed, corn, wheat, and cocoa. ADMis a major soybean processor in Brazil. The company is the second biggest ethanol producer in the USA.Commodities: Soybeans/Oilseeds, Palm Oil, Corn, Wheat, Cocoa, SugarProcessing: Farm products/services Storage and Transportation Investment and RMMilling grains Fertilizers Elevator/Storage Financial ServicesOil crushing Contract Farming Transportation Farmland acquisitionProcessed food InsuranceAnimal feedBio-fuel productionBunge remains the largest grain trader in South America, as well as the largest manufacturer of fertilizers in theregion. It is the world’s largest producer of soybean oil and a major manufacturer of biofuels, mainly turningBrazilian sugar cane into ethanol.Commodities: Soybeans/Oilseeds, Palm Oil, Corn, Wheat, Sugar, RiceProcessing: Farm products/services Storage and Transportation Investment and RMMilling grains Fertilizers Elevator/Storage Financial ServicesOil crushing Contract Farming Transportation Farmland acquisitionProcessed food Farmer Service AdviceAnimal feedBiofuel production Louis Dreyfus specializes in the merchandising of grains and oilseeds, coffee, sugar, wheat, and rice. LouisDreyfus holds a leading position in the Brazilian ethanol market.Commodities: Soybeans/Oilseeds, Palm Oil, Corn, Wheat, Sugar, Rice, Cotton, CoffeeProcessing: Farm products/services Storage and Transportation Investment and RMMilling grains Fertilizers Elevator/Storage Financial ServicesOil crushing Contract Farming Transportation Farmland acquisitionAnimal feed InsuranceBiofuel production
• Activities covered by the ABCD. Cargill is the biggest of the ABCD companies, as well as the largest private company in the USA. Cargilloperates across a wide range of commodities, products, and services around the globe. Considering ABCDcompanies Cargill is the biggest company with the largest sales, profit and number of employees (in 2013,Cargill had the profit of 2.31 billion $ and number of employees was 142.000).Commodities: Soybeans/Oilseeds, Palm Oil, Corn, Wheat, Cocoa, Sugar, CottonProcessing: Farm products/services Storage and Transportation Investment and RMMilling grains Fertilizers Elevator/Storage Financial ServicesOil crushing Seed Sales Transportation Farmland acquisitionProcessed food Contract FarmingAnimal feed Farmer Advice ServicesBio-fuel production InsuranceMeat, poultry, eggsArcher Daniels Midland (ADM) it is the world’s third largest processor of oilseed, corn, wheat, and cocoa. ADMis a major soybean processor in Brazil. The company is the second biggest ethanol producer in the USA.Commodities: Soybeans/Oilseeds, Palm Oil, Corn, Wheat, Cocoa, SugarProcessing: Farm products/services Storage and Transportation Investment and RMMilling grains Fertilizers Elevator/Storage Financial ServicesOil crushing Contract Farming Transportation Farmland acquisitionProcessed food InsuranceAnimal feedBio-fuel productionBunge remains the largest grain trader in South America, as well as the largest manufacturer of fertilizers in theregion. It is the world’s largest producer of soybean oil and a major manufacturer of biofuels, mainly turningBrazilian sugar cane into ethanol.Commodities: Soybeans/Oilseeds, Palm Oil, Corn, Wheat, Sugar, RiceProcessing: Farm products/services Storage and Transportation Investment and RMMilling grains Fertilizers Elevator/Storage Financial ServicesOil crushing Contract Farming Transportation Farmland acquisitionProcessed food Farmer Service AdviceAnimal feedBiofuel production Louis Dreyfus specializes in the merchandising of grains and oilseeds, coffee, sugar, wheat, and rice. LouisDreyfus holds a leading position in the Brazilian ethanol market.Commodities: Soybeans/Oilseeds, Palm Oil, Corn, Wheat, Sugar, Rice, Cotton, CoffeeProcessing: Farm products/services Storage and Transportation Investment and RMMilling grains Fertilizers Elevator/Storage Financial ServicesOil crushing Contract Farming Transportation Farmland acquisitionAnimal feed InsuranceBiofuel production
• Price setting power of ABCD There are relatively few traders purchasing bulk agricultural commodities for international trade. Because they deal in high volumes, the trading houses have enormous power affect the world price of those commodities,particularly with farmers, with whom they have contracts directly, but also with grain elevators to which farmers deliver their products. In countries like Brazil, those elevators are likely to be owned by Bunge and Cargill.The size of these four firms and the nature of the grain trade create high barriers for new companies to enter the market, and this reinforces the market power of existing firms. The barriers to entry are a function of asymmetrical information and of the capital required to engage in the business: because of huge fixed costs in building and maintaining the infrastructure to store and move grain.
• The concept of optimal competition intensity Concept founded in 1966 by Erhard Kantzenbach. This concept is an advancement of “Workable competition” concept. Kantzenbach rejected static equilibrium theory and described competition as an evolutionary and disequilibrium process, in which rivalry prevails.This rivalry competition is only an instrument to achieve social welfare goals:1. The growth of the social product2. The optimal distribution and composition of the social product3. The promotion of flexible adaptation of the economy to changing circumstances.Main characteristics of the optimal competition intensity:1. Rate of technical progress as most relevant indicator for competition2. Functioning competition as dynamic process;3. Equilibriums have to be disturbed through search and discovery processes.Requires especially: Financial opportunities for innovations; Incentives for their applicationCompetition intensity determines in how far functions of competition are fulfilled (effective competition intensity).For Kantzenbach the difference between potential and effective intensity of competition is crucial (Potential competition intensity ≠ effective competition intensity) Potential competition intensity:• Potential competition intensity with high market interdependency (Oligopolies)• With too much concentration, danger of competitions barriers (agreements)Potential and effective intensity diverge more strongly when there are fewer competing oligopolists and more homogenous products are sold.For example: A duopoly has unlimited potential competition, but the effective degree will be very low. Between 12 competitors there might be workable competition, and the optimal degree could be 9 competitors.The 6 competitors who have effective competition among themselves have a much higher degree of potential competition , so that either they will have some product differentiation or they will practice some restrains of competition that are tolerable. Beyond 12 competitors, the degree of effective competition sinks below tolerable.Criticism of the concept: Questionable: Competition intensity is determined by only two market structure elements:1) Static market structure approach (causal relationship is assumed);2) Feedback mechanisms are not taken into account3) Neglect of other determinants of competition intensity (Demand side, market entry and exit barriers) Not reproducible: market entry into a broad oligopoly leads to a lower competition intensity No differentiation between markets with regard to the role of innovations (cost for inventions and innovations) Limits to freedom due to political support of fusion or disentanglement respectively is questionable Problem of distinction (broad oligopoly to polypoly and tight oligopoly; moderate product differentiation and market transparency)
• Aspects relevant for evaluating the concentration in the input and grain trader sector Intellectual property rights limit the number of suppliers in a market in order to provide motives for innovation.Examples of intellectual property protection instruments are patents for inventions, copyrights for literary and artistic works, and plant variety protection certificates. Because intellectual property rights restrict market entry, they result in concentrated, protected markets. However, market power arrived at through intellectual propertyprotection preserves motives for investment in new products and technologies that are otherwise easily copied.Intellectual property protection sacrifices short-term market efficiency for long-term gains. By preventing the entry of imitators and competitors, intellectual property protection actually encourages inventors to exert (perform) the market power. A patented product shields (defends) its owner from competition and allows thepatent holder to charge prices higher than an efficient competitive market would allow in the short term. The resulting industry might not operate efficiently, in the sense that buyers and sellers could find more mutually beneficial. In addition, the institutions that assign, monitor, and defend intellectual property rights are costly to support.Intellectual property rights prevent the entry of new competitors but they encourage the development of substitute markets. In essence, intellectual property rights constitute a bargain (an agreement) in which society tolerates short-term market inefficiency for long-term gains in quality and productivity.Concentration and TechnologyA remarkable trend in the U.S. commercial seed industry in the 1990's was rapid consolidation (integration) as smaller seed companies were purchased by large agricultural concerns. Moreover, some of the acquisitions and combinations involved companies that had previously undertaken acquisitions of their own. For chemicalcompanies already involved in agriculture, seed companies were logical acquisitions because of complementarities between their chemical inputs and new genetically engineered traits.The combination of R&D in new biotechnology techniques in pharmaceutical and agricultural applications by firms with prior experience in industrial chemicals and other agricultural inputs prompted discussions of an emerging "life sciences" industry. When a biotechnology breakthrough in a particular crop has the potential toincrease sales, its acquisition by a market leader might lead to Federal antitrust investigation and subsequent action.Figure 3 shows a measurement of industry concentration called the "Four-Firm Concentration Ratio," the percentage of market share controlled by the four largest firms. With market concentration already at historically high levels for some major U.S. crops, leading firms might have meet a sensitivity for the acquisition of agricultural biotechnology firms were it to result in further consolidation.Mergers, Acquisitions, and Strategic Collaborations in Agricultural BiotechnologyConcentration can arise through many different types of business activities. Perhaps the simplest form is when a firm acquires assets from another firm in the same industry, leading to greater production capacity, sales, and market share for the acquiring firm. In some cases, this can result in market power and weak competitivepressure.However, concentration can occur through more indirect business relationships as well. Contractual agreements covering aspects from production to sales can increase effective concentration in an industry. The ultimate effect on concentration depends on factors such as industry structure and the exact nature of business relationshipsbetween companies. Using the Brennan et al. (1999) data set, this section examines the most prevalent forms of business relationships found in the recent consolidation of the U.S. seed industry.Acquisitions of Existing Businesses and Business UnitsThe sample included observations of several distinct types of new business activities and relationships. The most commonly observed activity occurred when one firm acquired another. Merger Joint Ventures – Research joint ventures can result in the development of new products to compete with existing ones, reducing market power. However, joint ventures can stifle competition as well. For example, a dominant firm could use a joint venture to co-opt a potential competitor. Licenses – Licenses are an extremely important business relationship among firms in the agriculturalbiotechnology sector. Licenses give firms greater access to patented technology, in exchange for a licensing fee, royalty, or some other consideration. Collaborations, Research Agreements, and Research/Strategic Alliances – The differences between collaborations, agreements, and alliances reported in the sample are not immediately obvious. Some of them probably represent self-identified nomenclature describing roughly the same thing as a joint venture, creating a jointly owned research enterprise. Other agreements probably involve sharing ofresources and personnel for the purpose of accomplishing a specific research goal.
• Relevant differences between formal (mathematical) models Formal mathematical models can be differentiated by:1. Commodity coverage: Models differ with regard to scope of commodity coverage (aggregation level). Output can be: 1.single commodity 2.specific sector model (consisting of all the outputs of the processing within the sector), specific sector of commodities (agriculture, fishery, forestry (Partial Equilibrium Model) 3. entire economy (General equilibrium model) Based on the commodity coverage the model can be General Equilibrium Model (GE) or a Partial Equilibrium Model (PE). General equilibrium model covers the entire economy, agricultural sector is detailed and non – agricultural sector is less detailed. Partial equilibrium model is applied when agriculture does not strongly interact with the rest of the economy.If we base our model on the duality theory, the main determinant of a model is the price of the commodity. Besides the prices, production inputs can also determine the model (production factors (land, labor, capital), and variable inputs (feed, seeds, fertilizers)).2. Level of aggregation of countries: We cannot make a global model without aggregation of countries because of lack of availability of data and workload. Range of countries aggregation varies between:1. Models with highly aggregated countries2. Those models with many individual countries or even different regions within the country (in these models countries are not much aggregated).3. Time dimension – Overall time horizon and length of time stepsThe modeler can decide to adopt a static model or a dynamic model.Static model does not depend on time. This model is used for comparative advantage.Dynamic models can be differentiated in:1) Fully dynamic models and2) Recursively dynamic models (characterized by repetition in time horizon)Fully dynamic models are seldom because they are very complex for solving and sometimes unrealistic if time horizon is large. Recursively dynamic models are solved for many time intervals within the entire time horizon.The modeler can adopt a short, long or mid-run analysis of the market.4. Policy instruments included into the model: Every kind of measure that potentially distorts trade should be considered. Some examples are 1) direct payments 2) irrigation subsidies 3) consumption policies (taxing special nutrients) 4) impact of import tariffs (if a country levies the same tariff for all countries or not).5. Methodology employed in the country models: In particular the model will be stronglyinfluenced how economic actors (agents) are represented and the parametrization.Parametrization means determining the values of the variable. The parameters can becalculated through econometric evaluation or taken directly from other source i.e. notestimated, but guessed in a “best way” or guesstimation.The inclusion of behavioral economic agents inside the model and the assumption of the duality theory must be applied carefully: households maximize the utility subject to an income constraint and firms maximize their profit. It is particularly relevant for general equilibrium models.6. Linking procedures: For each commodity sum of production of all countries must match to sum of disappearance of all countries (human consumption, feed, seed, waste, industrial use). In other words, the international market must be cleared.Firstly, the market should be cleared for each commodity i.e. the sum of production of countries must match with the disappearances of all countries.If net trade is modeled the clearing of the market is achieved with the construction of a world market price. If net trade is modeled then world market price is searched for which makes this happen.If we want to build a bi-lateral trade model price are adjusted for achieving international market clearance. Bi-lateral prices are adjusted for international market clearance. Nevertheless for all the equilibrium models the following condition holds: only relative prices matter.7. Model based on net or bilateral trade: Models depicting net trade take the differencebetween export and import as the volume exchanged with other trading partners. Globally net trade sums are zero. Models based on bilateral trade consider explicitly export and import quantities on a bilateral basis. These export and import quantities are traded with other countries on a bilateral basis. This approach is more realistic.
• Main problems of modelling 1. Consistency of data: no coherent (something that is connected) data set exists globally (e.g. Netherlands as the largest exporter of cocoa). There are many missing data as regards to policy instruments and capital use. Constructing a global model system is labor intensive rather than costly, (model has to be constructed and maintained and financial resources are required).2. Subjectivity of the model: a model always depends on the subjective judgment of the modeler and on the purpose it has been constructed (policy purpose, market research/analysis). The methodology employed can be highly influenced by strong assumption made by the modeler or on the contrary the core data may be more guiding in setting up the model than subjective judgment.3. Level of country and commodity aggregation/disaggregation: it has major implications for the interpretation of model results. There is no systematic way that can imply a loss of information.4. Differences in parameters: a key distinction between models that use the same database and similar levels of country/commodity aggregation lies in the assumptions relating to parameter values (e.g. Elasticity of the prices).
• Methodology employed in modelling a. Time dimension, dynamic vs. static models: Time dimension is particularly relevant in case we analyze the effects of a trade policy. Modelers make a difference in the type of analysis they conduct regarding how a change in trade policy affects the initial equilibrium of the economy, as to say the initial state before the policy is introduced. For static models time does not appear as a determinant of the model, while in dynamic model it is the essential variable. Dynamic models allow the analysis transmissions and adjustment processes over time. Alternatively, the comparative static approachstudies the differences between equilibria resulting from different assumptions on exogenous data or variables. The time path between equilibria is not the subject of analysis in comparative static models.In a comparative static approach, one examines how a change in policy changes the endogenous variables (because time is irrelevant here, we cannot compare two different periods). The concern makes a difference between the initial and final equilibrium of the economy and not with the transition required to move from the initial to the final one. One limitation of this approach is that it may fail to capture some of the costs and benefits associated with the transition and so overstate or understate the benefits from the change in trade policy.b. Models based on net trade or on bilateral trade (Armington approach)
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• Principles of a global model system The term model refers to a global system which is composed either by: 1) individual country models; 2) regional models of large countries or 3) aggregate model of several countries. Countries are linked by the exchange of goods and investments. Therefore binding constraints is imposed for the exchange as the market clearing for goods (total quantity exported = total quantity imported), and the equalization of financial flows are (as in the general equilibrium model) concerning the investments.
• Differences between general equilibrium models and partial equilibrium models Market equilibrium models can be classified as partial or general equilibrium models, depending on whether they attempt to depict a single sector of the economy or the economy as a whole.Partial equilibrium models treat individual international markets for selected trade goods. Such models for agricultural trade generally focus on trade primary commodities. They capture agricultural supply, demand and trade for unprocessed or first-stage processed agricultural products without taking into account trade in processed food products, despite the fact that the latter commodities represent an increasing share of world trade.Partial models treat international markets for a selected set of traded goods, e.g. agricultural goods.They consider the agricultural systems as a closed system without linkages with the rest of the economy. Partial models may be single- or multi-products. Partial models of international trade in agriculture generally focus on trade in primary commodities. Partial equilibrium models take into consideration only part of the market. Partial equilibrium model is one which is based on only a restricted range of data. A standard example is a price of a single product, while the prices of all other products are fixed during the analysis.The main area of application of partial equilibrium models is detailed trade policy analysis for specific products that represent a small portion of the economy in question. Policy-caused changes of a small sector are assumed to have little impact on the rest of the economy. While agricultural typically represents only a small portion of GDP in industrial countries, this is certainly not true in much of the developing world, where agriculture is often the dominant source of income and employment.The economy-wide models, or general equilibrium models, attempt to account for the linkages with the rest of the economy. Economy-wide general equilibrium models provide a more complete representation of national economies. This requires the explicit specification of factor markets for land, labor and capital. In other words, the essential general equilibrium features are captured by including factor movements between sectors in addition to allowing for demand interactions.Economy-wide models capture implications of international trade for the economy as a whole, covering the circular flow of income and expenditure and accounting for interactions among different sector of the economy.The essential general equilibrium properties are captured by including factor movements between sectors, next to allowing for demand interactions. Economy-wide models capture implications of international trade for the economy as a whole, covering the circular flow of income and expenditure and taking care of inter-industry relations.The main weakness of general equilibrium models is direct consequence of their broader coverage.Because there is a trade-off between keeping the model workable and making it realistic enough to be useful to the (policy) analysis, general equilibrium models are often constructed at high levels of geographical and sector aggregation, thus country and commodity specific detail may be lost. Partial equilibrium models, in contrast, are often used to assess the commodity specific impacts of reform.
• DEFINITION OF COMPTETIVENESS Competitiveness can be defined from several points of view, which change according to the different perspective or level of analysis we might refer to. Competitiveness can be defined from firm’s and industry’s perspective or from country’s perspective.At the lower level a firm is competitive if it can produce products and services of superior quality at lower costs than competitors. Competitiveness may also refer to a firm’s long-run profit performance and its ability to compensate its employees. To sum up, competitiveness is the sustainable ability to profitably gain andmaintaining market share.Competitiveness at a national level is given by the ability of the single country to distribute goods and services in the international economy, assuring a rising standards of living.National competitiveness refers to ability that nation’s ability to distribute goods and services on an international level and at the same time to rise standards of living.
• XCA – Revealed Comparative Advantage Export Indicator Balassa’s index defines country j’s international market share for a given product i, relative to the country’s international market share across all products. XCA standardizes the export share of a country by its relevance.Value range: 0 ≤ XCA ≤ ∞.Comparative advantage (a country is specialized in export): 1 ≤ XCA ≤ ∞.Comparative disadvantage (a country is not specialized in export): 0≤ XCA ≤ 1Neither comparative advantage nor comparative disadvantage: XCA=1If XCA>1 then the countries market share of “j” regarding the product is larger than its overall international market share.The export shares that consist the XCA ratio are influenced by trade interventions such as protection barriers in export markets and anti-export bias in domestic trade policy that impose a certain bias on the validity of the index. Particularly, the bias can be considerable when referring to agricultural trade, because of the widespread application of such policy measures in international trade. As a consequence, XCA is more likely to depict reality better where computed for processed goods or manufactures where trade interventions occur less frequently.The critical issue of this index is that it double counts the country and the product when accounting at the world trade of total merchandise. Another criticism that has been pointed out about this index is that it provides high numbers as a result. Furthermore results of XCA can be strongly influenced by country’sportfolio of production and trade.
• NXCA – Revealed Comparative Advantage Net-export indicator Value range: - 100 ≤ XCA ≤ 100Comparative ADVANTAGE: 0 ≤ XCA ≤ 100Comparative DISADVANTAGE: - 100 ≤ XCA ≤ 0If NXCA=0 – neither comparative advantage nor disadvantageAdvantages:Considers exports and importsData requirements are low (only export and import values)Easy to calculateCalculation possible for the whole agribusiness, specific branches or single productsDisadvantages:Not relative to the world but only to the total trade of the nation
• RXCA – Relative Revealed Comparative Advantage Export Indicator Vollrath’s Relative revealed comparative advantage export indicator (RXCA) is precisely relative as it eliminates the double counting of countries and products excluding from the value of world export the country and the commodity considered ( total merchandise trade value – commodity value; world export value – the country’s export value ).Value range: 0 ≤ XCA ≤ ∞.Comparative disadvantage: 1 ≤ RXCA ≤ ∞.Comparative advantage: 0≤ RXCA ≤ 1Neither comparative advantage nor comparative disadvantage: XCA=1
• RMP – Relative import penetration Indicator Value range: 0 ≤ RMP ≤ ∞.Comparative advantage: 1 ≤ RMP ≤ ∞.Comparative disadvantage: 0≤ RMP ≤ 1Neither comparative advantage nor comparative disadvantage: RMP=1
• RTA – Relative Revealed Comparative Advantage Trade Indicator (RTA) Can the RTA be misleading?A positive RTA indicates competitive advantage– The RTA can be positive, even if the RXCA is <1;– RXCA values of <1, however, indicate a lack of competitiveness;A clearer indication of competitiveness is given if RTA>0 and RXCA>1Competitive advantage: 0 ≤ RTA ≤ ∞ and 1 ≤ RXCA ≤ ∞Competitive disadvantage: -∞ ≤ RTA ≤ 0 and 1 ≤ RMP ≤ ∞
• How did the $/€ exchange rate changed in 2014? -2014: depreciation of € with respect to $-encourages exports of european goods, hampers export of US goods-benefecial in sector where business is mainly done in $ (automobile...)->3rd of October 2014 US Commerce Department:  German exports to the US rose by 10.7 %. -BUT: the European growth on the basis of the advantage of the exchange can be a weakness in the long run. -> the ability of growing export as an index of competitiveness might be misleading. -a large share of EU export goes into other EU countries, therefore it is done in €- stronger dollar together with a cheap oil price (lowering transportation cost) is forecast to lead an increase in the GDP of several European countries-risk of inflation, bananas are getting more expensive Appreciation: an increase in the exchange rate. The home currency becomes relatively more expensive for foreign buyers. Appreciation also means that foreign currency becomes relatively cheaper to buy. If prices in both countries remain the same, an appreciation will make foreign good relatively cheaper, leading to anincrease in imports. It also means that, even if prices remain the same, domestic good will be more expensive to foreigners. As a result, country’s net export – towards EU in this case – will fall.Depreciation: a decrease in the exchange rate. The home currency becomes relatively cheap for foreigners to buy. As a consequence foreign currency becomes relatively more expensive to buy. If prices in both countries remain the same, depreciation will make foreign good relatively more expensive, leading to a fall in imports. At the same time domestic goods will be cheaper to foreigners. As a result, the home country netexport will increase.
• Explain the LOP and PPP Theory. Discuss problems with respect to the PPP theory: LOP (Law of One Price): The law of one price states that the same good (homogenous good) should be sold in different competitive markets for the same price, when transportation costs and other barriers between markets are not significant. The law of one price exists due to arbitrage opportunities. If the price of a commodity is different in two different markets, then a consumer will purchase the good in the cheapermarket. People would have an incentive to adjust their behavior and prices would tend to adjust to reflect this changed behavior until one price is achieved across the markets.The exchange rate (e) must be equal to the ratio of the two prices of the goods expressed in the different countries.PPP (Purchasing Power Parity) is the macroeconomic counterpart to the LOP. It is the application of the one price law across countries for all goods and services, or for representative groups “baskets” of goods and services. The price levels in two countries are equal if expressed in a common currency. Absolute PPP imply that the exchange rate (e) must be equal the ratio of the price levels in the two countries. If the nominalexchange rate of one country exceeds the PPP the currency is over valuated. On the contrary if the nominal exchange rate is smaller than the PPP the currency is under valuated.Common critique Big Mac index and PPP1) Difference Long/Short run: Empirical evidence has shown that for many goods and baskets of goods,PPP is not observed in the short term, and there is uncertainty over whether it applies in the long term.Deviations from PPP are therefore greater in the short run that in the long run.2) Heterogeneity of goods traded, does affect consumer preferences;3) Non traded service: some services and goods are often not tradable and limited to a specific geographical localization;4) Market competition: in some sector there must be an imperfect competition which may result in arbitrary price discrimination (“pricing to the market”). A firm sells the same product for different prices in different markets to maximize profit, based on the expectations about what consumers are willing to pay.
• WHAT IS THE BigMac Index AND HOW IT IS LINKED TO THE LOP/PPP. CALCULATE THE OVERVALUTATION/UNDERVALUATION OF A CURRENCY BASED ON THE Big Mac Index GIVEN e.g. THE FOLLOWING DATA The Big Mac was invented by the Economist in 1986 as a guide to better understand whether currencies are at the correct level. It is based on the theory of PPP, the idea that in the long run exchange rates should move towards the rate that would equalize the prices of an identical basket of goods and services (in this case a burger) in any two countries.The Big Mac PPP is the exchange rate that would leave burgers costing the same potentially all over the world (Big Mac is sold in more than 120 countries).The first critique that can be pointed out is that Big Mac is not traded across borders as the PPP theory demands. We can also expect that average burger prices are cheaper in poorer countries than in rich ones because labor cost is lower. The prices of traded goods will tend to be similar to those in developed economies, but the same do not hold for the prices of non-tradable goods (housing, labour – intensive  services) are generally much lower. Furthermore the Big mac index should be adjusted for the GDP per person.
• PORTER’S DIAMOND Porter’s aim was to determine international comparative advantage, based on the conditions within a country which may help business to be competitive. The perspective that he adopted was to compare the industries of the nations, not the nations themselves.He introduced a concept of “clusters, or groups of interconnected firms, suppliers, related industries, which arise with particular conditions. As a rule Competitive Advantage of nations has been the outcome of four interlinked advanced factors and activities between countries in these clusters. These can be influenced in a pro-active way by the government and by the chance.The four determinants of competitive advantage are:1) Factor Conditions: the capability to increase factor quality and the efficiency of their use is more important than the quantitative endowment with factors. The factors can be physical (land) or human capital, infrastructure and qualified labour. Porter points out that these factors are not necessary nature-made or inherited, they may develop and change. Political initiatives, technological progress or socio-cultural changes, for instance, may shape national factor conditions.2) Demand Conditions describe the size and composition of the domestic demand. Industries will benefit of economies of scale only if they are capable of interpreting the signals of consumers. A good condition for competitive is also given by the behavior of consumers, who should be sophisticated/demanding, openminded to innovation, anticipatory of world demand. Firms facing such a demand structure are more likely to be innovative and to sell superior goods;3) Related and Supporting industries: the industry hub is regarded as a major factor of competitiveness.The existence or non-existence of internationally competitive supplying industries and supporting industries is really important. Competitive suppliers guarantee the efficient and fast access to high quality inputs and to lower purchasing prices. Competitive buyer industries can guarantee a larger domestic market. The interaction of competitive firms along the value chain contributes to a joint product/process innovation.Supporting industries as consulting agencies and financial institution are relevant too.4) Firm strategy, structure and rivalry: Conditions in a country that determine how companies are established. The basic assumption of Porter is that firm strategy and organization varies across country and it has a strong cultural pattern. Countries will tend to be more competitive in those industries for which their respective management style is best suited. Domestic rivalry forces firms to innovate and improve efficiency.A market which is too concentrated may serve as an entry barrier.Porter also sustained that chance has played an important role for most industries both positively or negatively. Governments can influence the whole scheme, shaping every of the four determinants but in its decisions it can also be influenced by them. According to Porter the ideal government should just set a series of frame conditions and guarantee that fair competition can take place in the domestic market.Protectionism and subsidies may damage long-term competitiveness. Government should stimulate competition and minimize market distortion.The main criticism which arose from this theory come from the fact that the “diamond” was studied based on case studies of primarily developed countries and it might be difficult to transfer it to the situation in the developing countries. Plus Porter did not consider the influence of the increasing relevance of multinational enterprises and in general of international players in word trade.
• "The harmonization of consumer protection policy at the international level implies that countries have to give up part of their sovereignety ." Discuss this statement and illustrate with a graphic . The harmonization of consumer protection policies at the international level implies that countries have to give up a part of their sovereignty.One of the conflicts that characterize the WTO is the extent to which autonomy to protect the country legitimate interest clash with the development of free trade. The solution lies in the Non-Tariff Trade Barriers.Nonetheless it is questionable and arbitrary the definition of what a legitimate interest is.GATT Article XX on General Exemptions lays out a number of specific instances in which WTO members may exempt from GATT rules. According to GATT Article XX WTO members may adopt policy measures that are in conflict with GATT discipline but necessary to protect human life or health.Further specification on this rule are to be found in the Agreement on Technical Barriers to Trade (TBTAgreement) and in the agreement of Sanitary and Phitosanitary Measures (SPS-Agreement). Protection objective may lead to limit the level of free trade liberalization. And normally the danger of misuse increasewith increasing liberalization.The aim of protection policies is to prevent undesired consequences of trade liberalization. These policies might be considered as desirable in case they truly guarantee the protection of life and health of the consumers. Nevertheless there is a risk of arbitrary use of them in order to lead to unjustified NTBs. Normally the danger of misuse increases with increasing liberalization.In order to find equilibrium one country should evaluate and balance the costs of sovereignty against the cost of harmonization.Cost of sovereignty are composed by:1) cost due to cross border externalities which lead to a welfare loss2) transaction costs due to necessary internal adjustments in consumer protection policies3) abuse cost that occur due to consumer protection policies4) information costs for the consumer who have to distinguish/select between a high variety of different products and process qualities;Finally the cost of sovereignty increases with income level as the ethical concern about production and process characteristics gain importance.As most of those ethic characteristics are without product relevance, the danger of misuse and the respective cost increase.On the other hand cost of harmonization are composed by:1) preference cost due to ignoring different preferences of nations regarding consumer protection policies;2) decision making and dispute costs3) cost deriving from not taking advantage of the dynamics of competitiveness: central regulation reducesincentives for innovation and paralyze new findings;4) control costs for assuring the compliance with central regulation as border level.
• DIFFERENCE BETWEEN RAW SUGAR AND WHITE SUGAR The Raw sugarisa cane sugarwhich has been minimally processed and is the product of the first stageof the cane sugar refining process.The white sugarissugarthat has been refined and washed so that it has awhiteappearance and no molasses flavor.Raw sugar (slight browndue to the molasses rests (leftover)) has a lower price(335.2 €/ton–EC reference price) than the processedwhite sugar (404.4 €/ton-EC reference price).Contracts are made for raw sugar but the “quality” i.e.the concentrated sugar content is much higher in white refined sugar. The difference between raw and white sugar isin a production process. A raw sugar is the first product of the sugar cane refining process.
• WORLD PRODUCTION VOLUMES Sugar In 2013/2014 the world production of sugar was 175 million metric tonnes (USDA (raw value)). There has been a slight decrease of the sugar world production.Approximately 80% of world production volumes of sugar is produced from sugar cane, which is largely grown in tropical countries. The remaining 20% is produced from sugar beet, which grows mostly in the northern hemisphere.Increase of the sugar production in the world market and a general decrease of the share of beet sugar in overall sugar production (from around 45% in 1960 to 20 in 2014%)
• TOP THREE COUNTRIES REGARDNG PRODUCTION VOLUME SUGAR World: Brazil (22%), India (15%), EU (10%), China (8%)In EU: Germany, France, PolandEU is a net importer of sugar, before the structural reform (see further down) it was a net exporter. The European Union is the world's biggest producer of beet sugar and the main importer of raw cane sugar for refining. The EU sugar market is regulated by production quotas, a minimum beet price and trade mechanisms.
• VALUE CHAINS IN SWEETENER MARKETS The market of sugar in the retailing stores is not very big in comparison to the market of sugar as an additive in processed food. Non sugar sweeteners are used to provide the same effect as natural sugar in terms of taste, but are mostly artificially synthesized, such as aspartame (a very sweet substance used as an artificial sweetener), saccharin (used in food and drink as a substitute for sugar) and sucralose (also an artificial sweetener) but there are also natural ones such as stevia and chicory.There exists price competitiveness between sweeteners and they are generally all cheaper to produce than sugar. Therefore, promotions of artificially sweetened processed products as “healthier” than the ones containing sugar most probably are made due to the higher profit that the companies earn from selling products containing sweeteners rather than sugar.nter-linkages in sweetener supply chain:The market for cereals, sugar cane, sugar beet and some chemical components have connected supply chains.Cereals are used to obtain starch which can be used for ethanol production, in the same way as sugar/molasses from beet and to a higher extent cane is also used in ethanol production. From starch we can also obtain natural sweeteners such as glucose/isoglucose, which are sold to food manufacturers and non-food manufacturers (compete for same market as sugar).Chemical components produced by chemical manufacturers are used in the production of chemical sweeteners (such as aspartame) which are used by food and non-food manufacturers (such as the chemical industry).SLIDE 17
• . PRODUCTS RESULT FROM SUGAR BEET PROCESSING Out of one sugar beet come: Sugar 16 – 17 % (Human consumption, ethanol)Dried beet pulp 7.5 % (Animal feed)Molasses 3 % (Animal feed, yeast, ethanol)Beet Pulp and molasses (liquid) are by-products from sugar beets and can be used as an additive to animal feed for mainly cattle production, or for producing yeast.Sugar is used for human consumption and ethanol production.Beet pulp is a byproduct created during the process of extracting sugar from beets. After almost all of the sugar has been removed, the remainings the beets are known as the pulp. This substance is dried and used as food for livestock, especially horses. Beet pulp serves no further purpose to the beet sugar makers once the sugar has been extracted, so it is considered a waste product and is very inexpensive to purchase.Molasses is a thick, brown to deep black, honey-like substance made when cane sugar or beet sugar is processed.Almost 80 % of the beet is water. This leads to that the sugar production always takes place close to the field due to the high transportation costs (of only water). Sugar cane and sugar beet are absolute substitutes.
• CONTEXT ETHANOL SUGAR Ethanol is an alcohol based, quasi-renewable fuel, made out of agricultural raw material, the most common ones are corn and sugar cane. Ethanol from sugar cane is mainly produced in Brazil, by the fermentation (a process that converts sugar to acids, gases or alcohol) of sugarcane juice and molasses.Sugarcane ethanol is a fuel based on alchohol and it is produced by the fermentation of sugarcane juice and molasses. Because it is a clean, affordable and low-carbon biofuel, sugarcane ethanol has emerged as a leading renewable fuel for the transportation sector.The sugar and ethanol markets use the same raw material input and are hence highly dependent.The general biofuel debate “food vs. fuel” considers the consequences that the demand (often promoted through policy measures) for biofuels have on world food prices (levels and volatility) and the overall world food supply and land use. Ethanol and sugar production is highly relevant in this context.
• PROMOTION OF THE USE OF BIOFUELS Promotion of Ethanol use is done by:1. Mandatory blending (25% ethanol in Brazil) - convenient measure for state budget because the price gap is covered completely by the consumers.2. Tax reduction – higher taxes for gasoline, lower taxes for biofuels.3. Subsidizing the use of “flexi-fuel” vehicles (that can be used with any proportion of both ethanol and/or gasoline)Benefits of using ethanol as biofuel:1. Ethanol is good for the environment - Using ethanol helps to reduce carbon dioxide (CO2) emissions by an average of 34% compared to gasoline.2. Ethanol is widely available and easy to use.3. Ethanol is good for the economy - Ethanol production supports farmers and creates domestic jobs.
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• CONNECTION BETWEEN SUGAR AND ENERGY MARKET The sugar and ethanol markets use the same raw material input. Therefore, demand for ethanol will have an effect on the prices of the sugar market and the other way around. An alternative for an overcapacity of sugar factories in surplus is to produce ethanol for the energy market. This is especially beneficial with government measures such as tax reduction which speeds up demand for ethanol and raise prices. The market for sugarcane based ethanol in Brazil would not be competitive without these measures, but they have been made more flexible to changes in sugarcane harvest, price and sugar production.
• Principles of the EU sugar CMO EU sugar policy: an example• For a quota regime• For the lack of clearness of the WTO Agreement on Agriculture• For a systematic reduction of production capacity within a quota regimeEU CMO (Common market organization) for sugar provides intervention on the internal market, including the fixing of reference prices and production quotas, and for certain support measures for European products when they are traded on international markets.Price support:Before reform: Minimum support price/intervention price for white sugar. Raw sugar & beet prices calculated in white sugar equivalents of standard quality.Intervention purchase system to guarantee the minimum price.Today: Reference pricesPrivate storage aid can be activated if EU market prices fall below 85% of the reference price.Production quotas:Quota level was fixed at MS level and referred only to the maximum quantity of sugar eligible for price support. MS were free to produce more but that surplus production had to be exported. An important purpose of the quota-system was to guarantee each MS a certain share of the EU sugar market. This was particularly important to the relatively less efficient producers.EC limits for subsidized exports• EU 12: 1.277 Mio. t• EU 15: 1.273 Mio. t• EU 25: 1.374 Mio. tOut of quota production:So called C-sugar, it was exported without subsidies, financed by producers with the surplus created by the high price.Export subsidies financed by: Production levies (see below) charged on producers to export the surplus of domesticproduction over domestic consumption. State expenditures to export the amount of sugar imported by preferential conditions (  see preferential imports below)Production levies to finance part of the in-quota export refunds and production refunds:A-quota: charged (by the EC) a basic levy of 2 % of the intervention price.B-quota: charged a variable levy with a maximum of 39.5 % of the intervention price, depending on the total costs of the export subsidies.(A-quota is based on projections of EU sugar consumption for following year and B-quota is 10 to 35 % of the A-quota, allocated to MS depending on production level)Preferential imports Of raw cane sugar from ACP (Africa, Caribbean, Pacific) and LDC (Least Developed Countries) exempted from import duties.
• Temporary scheme for the restructuring of the sugar industry in the community Before the reform, the sugar supply exceeded the demand in the EU due to the quota price support.The out-quota surplus production was exported with subsidies paid by the same producers. The industry was accused by other sugar exporting countries (Thailand, Australia, Brazil) for double subsidizing sugar exports with the high minimum prices leading to that the EU exports substantially exceeded the permitted levels established by the WTO.The appellate body (of WTO) concluded:1. C-sugar was cross-subsidized and had to be integrated into subsidized exports2. ACP imports had to be integrated into subsidized exportsThe EC established the reform scheme in 2006 with the aim to restructure the industry and to reduce unprofitable production capacities. Implementing it, the existing quotas for sugar, isoglucose and inulin syrup has been reduced on several occasions.The reform led to a large reduction in quota sugar production of around 6 Mio tons -30%. This left a remaining quota sugar production of around 13.3 Mio tons. Key to the reform was a 36% cut in the reference sugar price (from € 631.9/tonne in 2006/2007 to € 404.4/tonne in 2009/2010) and the removal of the intervention mechanism that guaranteed a minimum sugar price.A Restructuring Fund, financed by sugar producers, was set up to encourage less competitive sugar producers to leave the industry. The producers were compensated for 64 % of their income losses.The least productive units were (temporarily during the reform process) paid to give up their quota production. There was a subsidized reduction of production capacities and many producers set aside part of their production capacity. (Ex: Germany where one production unit was taken out of service to lower production quantity).The reform have led to a sharp fall in the number of sugar producing factories in the EU and an overall reduction of 60 % of producing capacity between 2000 and 2008. The industry has today a higher average profitability and the price for sugar is lower.The reforms have led to a sharp fall in the number of sugar producing factories within the EU and an overall reduction of 60 % of producing capacity between 2000 and 2008. The industry has today a higher average profitability and the price for sugar is lower.Out of quota production today interpreted as non-subsidized exports, can be:1. Exported up to the EU's annual WTO limit of 1.35 million tonnes2. Used for industrial purposes, to produce bio-ethanol3. Carried forward to the next marketing year.4. Used for the specific supply regime for the farthest regions
• Carcass weight Carcass weightrefers to theweightof an animal after being partially butchered, removing all the internal organs and oftentimes the head as wellas inedibleportions of the tail and legs.
• WORLD PRODUCTION (2010/11 –2014/15) pig meat Total production of pig meat increased from 2010 to 2014 and a rise of production of pig meat is expected in 2015. Total production of pig meat in 2010 was 103 million tones CWE. During the years the production volume slightly increased and in 2014 it was 110 million tones CWE. In 2015 a slightly rise of pig meat is expected.The biggest pig meat producer in the world is China. EUs the second largest world producer of p ig meat and the third largest is USA
• FACTORS DETERMINING COMPETITIVENESS pig meat Porter’s diamond:1. Factor conditions:Factor conditions are human, physical, capital and knowledge resourcesas well as infrastructure. Specialized resources are often specific for an industry and important for its competitiveness.Family business and tradition are concentrated at regionallevel. Family business is concentrated in particular region, and thehistory/tradition in pig production is a guarantee of competence in this market.The position of nations in factors of production, such as skilled labor or infrastructure isnecessary to compete in a given industry.2. Supporting and related industries:According to Porter,clustersare geographicalconcentration of interconnected companies and institutions in a particular field. Clusters are consistedof multi-directionalconnections betweensuppliers, distributors and companies producing complementary and/or related products and services. Because of the higher density,processor and feed producers will be located near the farmers, where there is a higher demand, and this will lower costsof both industries. Moreover,because of the high animal density,the cost of transportationto the slaughter houses will be lower too, providing more efficient value chain. Each firm can benefit of economies of scale. For example mixing industryfirms will belocatedin the same area, because of the higher demand in compound feed.Supporting industries will play a relevant role too, as consultancies specialized in pig production. Demand conditions:This means concentration ofdemand at regional level.Demand conditions atthe home market can helpcompanies to create a competitive advantage, whenhome market buyers pressure firms to innovatefaster and to create more advanced products than those of competitors.Firm strategy:Farmers are not directly competitive in the market, but they are rather price takers. Therefore they have the interestof cooperating together for negotiatingthe price with the slaughter houses,setting up a benchmark. Chance:breakout of a new technology for increasing efficiency of pig production.Government:set of environmental lawsand limits on manure spillage. Farmers in the cluster can bear the higher cost and sharing them along the system. The government can also provide the adequate infrastructure for transportation, which will benefit the regional economies
• FACTORS INFLUENCING INTEGRATION BETWEEN DIFFERENT STEPS OF THE VALUE CHAIN pig meat 1.Increased integrationbetween slaughter and packer firms and producersMany slaughter and packer firms are linking more closely with producers, viaproductionand marketing contracts, or via vertical integration. Multiple motivations exist for this increased integration. Economies of size and scopeare very significantcontributors, not only to increased industry concentration, but also to increasedintegration. 2.Production of high quality pigs that havea processor brandAnother strong motivation for integrationis to provide highqualitypigs that can be given a processor brand, for example Dutch system of Quality Control (IKB). IKB is an integrated quality program that controls the entire production chainfrom breeders overslaughterhouses to the retailers. Consumers buy pork with IKB-logo. The program guarantees origin of pig meat, production of meat, feed sanitation(medical –health measures), use of veterinary medicines, etc. A slaughterhouse obtains information about the health and origin of the pigs from producers and producers are given the results of examinations performed in theslaughterhouse. In the IKB program, farmers can choose to whom they will selltheir slaughter pigs.3.Increased quality demandby consumersfor pig meatIntegration between value chains in pig meat productionbecomesmore important in many countries because oftheincreasedconsumer’squality demands. Assurance of quality, both in the product and the productionprocess, is becoming increasingly important in the world market. Other motivesfor vertical integration: (1) decrease in transaction costs; (2) decrease of risk and uncertainty; (3) assure input or output supplies; (4) correct market failures; and (5) avoid government restrictions, regulations or taxes.
• EU PIG GRADING SYSTEM Objectives of EU Pig Grading system:Price comparisonbetweenEU membersEstablishing fair payment to the producersObtain MarkettransparencyCarcass classification gradingsystemCarcass classificationhas played an important role in the improvement of meat carcass quality by promoting leaner meat production in orderto meet consumer demand. The EU has encouraged the meat industry touse carcass classification gradingsystems wherecarcasses are graded by their conformation(i.e. shape) and their lean meat content.The following grading classification:S: lean meat > 60%E: lean meat 55-59%U:lean meat 50-55 %R:lean meat 45-50 %O:lean meat 40-45 %P:lean meat < 40 %Any pigs that are identified with carcassfaults, such as being scraggy, deformed, pigmented, coarse skinned, orbeing partially condemned are recorded as Z on the carcassclassification documents.
• WHAT IS THEAutoFOM GRADING SYSTEM AutoFOM (AutomaticFat-o-meat‘er)is a grading system for pigs, which measures the lean meat percentage of carcass. AutoFOM uses fully automatic 3D ultrasound scanning of a carcass. This is one of the most accurate systems in the worldand it provides information about the total lean meat percentage of carcass and the lean meat percentage of carcassin the 4 primal cuts: ham, loin, shoulder and belly.In addition, it also determines the weight of the saleable meat (the meat that can be sold) in the whole carcassand in the four primals.On the purchaseside, AutoFom offers a more advanced and accurate evaluation of the commercial value of the carcasses. AutoFom data is used for optimizing production by sorting primal cuts according to yield.
• PRICE BASED ONAutoFOM grading system (saleable cuts)Lean meat percentages To ensure thesuccess and acceptance of a carcass pricing system, human involvementmust be minimal. Producers willnot accept true value-based marketingunless carcass value is determinedvia objective mechanical instrumentation.An EU grade canbe allocated to a carcass by using the lean meat percentage figurebelow:S: lean meat > 60%E: lean meat 55-59%U:lean meat 50-55 %R:lean meat 45-50 %O:lean meat 40-45 %P:lean meat < 40 %Basis for revenues: Carcass weight (CW) x price/kg CWREVENUES= CW*price/kg of CW•Lean meat percentage as basis for price/kg CW•Price differentiation according to lean meat percentage (not just according to the EU grading system)•Decreases of price of CW is above or below a fixed limitAutoFOMcan operate at a speed of 1,200 carcasses per hour to predict individual primal cut weights (bone-in or boneless), percentage of primal cuts, or percentage of carcass lean tissue. United States pork plants that utilize AutoFOM technology find itan effective tool for selecting carcasses for case ready production and reduced fat bacon.The AutoFOM is more adequatethan lean meat percentage, while determines the expected weight of saleable (valuable) cuts.Price mask: Saleable cuts1.Weight (of ham, loin, shoulder and belly) * index/kg=SUM INDEXper primal2.Total sum index of four primal cuts= Sum index of ham, loin, shoulder and belly3.Total sum * price/kg = PAYMENTBasis for revenues: Weight of valuable cuts• Index based on weight of ham, loin, shoulder and belly• Cuts are multiplied with a factor reflecting their value• Definition of price mask differs between slaughterhouse companies
• DEFINITION OF FDI; ACTIVITIES NOT COVERED BY FDI Worldbank, 2012 official definition: FDI are the net inflows of investment to acquire a lasting management interest in an enterprise that operates in an economy other than that of the investor. Where, Net inflows = new investment inflows to the country minus disinvestment in the country A lasting management interest means that the investment has to consist at least 10% or more of voting stock. Definition of FDI according to OECD: FDI is a cross-border investment by a resident entity in one economy with the objective of obtaining a lasting interest in an enterprise resident in another economy.In other words, when a company invests money in order to acquire production plants and production equipment abroad, this is regarded as FDI. By doing so, investing firm can get control of its foreign operation and can affect managerial decisions of the foreign operation. It also becomes a Multinational company and can sell products in foreign markets without exporting.FDI includes: 1) mergers and acquisitions 2) building new facilities 3) extending an already existing activity abroad 4) green-field investment (creation of a new firm abroad).What is not covered by the term FDI is the purchase of foreign shares, bonds or other securities without managerial involvement. Such activities are called portfolio investments and are counted as indirect investments.
• DESCRIPTION OF MOST COMMON FORMS OF FDI Horizontal FDI: FDI in the same industry abroad as the company that operates at home. In other words the company duplicates its activities at the same value chain in a host country through FDI.Vertical FDI: takes place when a firm through FDI moves upstream or downstream in different value chains. Can be backward - investments into industry that provides inputs for firm’s domestic production orForward – investments in an industry that uses outputs that domestic firm produces (sales and distribution).In the agricultural sector FDI are mostly vertical and backward because firms need certain inputs (fruits or vegetables for example) with certain quality. In such cases it is much easier to organize your value chain abroad and obtain a level of control over it.
• COMPARASION OF EXPORT AND FDI; ADVANTAGES AND DISADVANTAGES Export:Low sales potential in the foreign country, Little or no product adaptations required, Liberal trade policies, Existing political riskAdvantages: minimize the risk, speed of entry, max. economies of scale (using existing plants)Disadvantages: transport cost, low access to local information, firm seen as an outsider FDI: trade barriers, high sales potential, small cultural distanceAdvantages: good knowledge of foreign market, firm is insider - can better apply specialized skills, no transport costsDisadvantages: higher risks than with exporting or just licensing, requires higher commitment
• EFFECTS OF FDI FOR THE HOME COUNTRY AS WELL AS FOR THE HOST COUNTRY? FDI can provide a firm with new markets, cheaper production facilities, access to new technology or with demand of new products.Proponents of FDI: home country of the firm and the foreign host country benefitOpponents of FDI: multinational firms can have to much power over smaller ones and can be bad for competition.Home country:1. Benefits:Positive effect on trade balance – FDI can create demand for home country exports of equipment & goods.Positive effect on employment – if this additional demand creates jobs.Resource – transfer effects – increased knowledge from operating in a foreign environment2.Costs: Negative effect on trade balance – if the purpose of FDI is to supply home market from a low-cost production location or if FDI is substitute for direct exports (the investing firm will benefit but the home country will lose the value of these exports).Negative effect on employment – if FDI is a substitute for domestic production, this will lead to reduction in home country employment. Host country:1. Benefits:Resource – transfer effects – when new capital, technology, management skills are brought into the country. Leads to innovation, productivity growth and overall economic growth.Positive effect on employment – jobs are created, often with higher wages.Positive effect on trade balance – if FDI replace imports of goods and services; or if sources of export increase.Positive effects on competition & economic growth2. Costs:Negative effect on competition – if the foreign subsidiaries have greater economic power than domestic firms, then domestic firms cannot compete with them.Loss of national sovereignty – loss of economic independence: Key decisions that affect host economy will be made by foreign partner without control of the host country. (as mentioned above multinational firms have great economic and lobbying power)
• FDI IN LAND: GLOBAL DRIVERS Developing countries often face a lack of domestic investment capacities. FDI in agriculture are, therefore, crucial for strengthening the agricultural sector. These FDI in agriculture are often closely linked to FDI in arable land in order to secure and to control the access to commodities produced on the land.FDI in land can be characterised as follows:“FDI in land by a foreign company or state is based on a lasting interest in taking control over land use rights. The transaction includes either rights of land-use or land-ownership. The land-use rights are generally valid for a limited period and can possibly be extended.”Even when it is legally not possible to buy (own) land in a foreign country, an investor can obtain the rights to use it for a long period of time (in some cases, 50, 60...100 years).Supposed global drivers:It is commonly agreed that development on the global markets for agricultural commodities increased the attractiveness of FDI in land. Long-term developments refer to: Expectation of high and rising level of prices for agricultural commodities due to reduced growth in production and rising demand because of population and economic growth. Climate change - leads to a possible loss in overall productivity. Another advance in developed countries refers to the political support of agro-fuels (US, Brazil and the European Community). These countries have established mandatory rates for agro-fuels for energy used in the transportation sector. Hereby, competition between food and agro-fuels production for restricted land area increases and countries characterized by suitable soil and climate conditions for agro-fuels are now on the target list of foreign investors. Trade Liberalization: The process in trade liberalization and reforms of national agricultural policies of large agricultural exporters caused an increase in food price. Climate obligations. The actual emission reductions are transferred to other – mainly developing – countries, in order to cut the costs of reduction. Food crisis in 2007 and 2008: the price peaks for agricultural products led to a special focus on food security particularly for food importing countries and their dependency on the world markets. Also the crisis caused transfer of investments from other sectors to land sector.
• FDI: Drivers of state-backed and private investment -FDI: foreign direct investment Private Investment economic drivers:- Increasing shareholder value because of rising food prices due to population growth and climate change;- Increasing shareholder value because of emerging agro-fuel markets mainly in the US and EU;Anticipating growing land prices;Searching for alternative investments as a result of the financial crisis; State backed investment: Economic drivers:Reducing import costs for food• Securing future energy security• Securing future food security• Reducing dependence on (volatileglobal) price developmentPolitical and strategic drivers:Meeting growing demand for agrofuels;Complying with international agreements (Kyoto protocol, etc.);Reducing the dependency on the world market for food and fuel; Foreign direct investors in land can be classified according to their primary motives based on the political goals and economic background of their domestic frame:1. Investors from oil rich countries with poor resources of arable land, water scarcity and harsh climate conditions: They aim at improving food security and reducing the dependence on high and volatile food prices. These countries are rich in capital and able to invest lots of money especially through state funds that serve state interests.Based on available information, it seems that the investors from oil rich and emerging countries mainly are governments or state enterprises or state funds respectively.2. Investors from industrialized and emerging countries with large population and rapid economic growth: They face an increasing demand for feed, fiber and for renewable resources and try to countervail it by FDI in land. This strategy helps them to be less dependent on the world markets.In contrast, investors from industrialized countries primarily are private companies investing mainly in agro-fuel projects. When governments try to follow their food or energy strategies by investing in foreign lands, they usually set up investment contracts with the government in the target countries (State-backed investments), while private investments are mainly driven by the goals of the companies (especially short and long-term profit, sustainable development of the firm).
• FDI IN LAND: THE PROBLEM OF LAND USE RIGHTS In the context of land use rights, related domestic law is often characterised by legal pluralism with a mixture of official and informal land provisions. Informal land rights are based on tradition and mutual recognition within the rural communities. A lack of recognition of these informal land rights by the state makes it difficult for landholders to enforce their traditional rights. This indicates that the target country plays an active part in weighing domestic interests and has the potential to protect sustainability and food security. But even if such protective aims are followed on paper, very often the enforcement is lacking: the right to compensate domestic owners for expropriation within the target country itself very often is laid down in domestic law. However, it often fails due to missing property documentation.
• Possible economic impacts of FDI in land on rural livelihoods Positive Effects: Increasing productivity on agricultural land.◦ access to agricultural inputs◦ applying technologies◦ Investments in irrigation schemes Market access for farmers Generating income Improving infrastructure Transfer of know-how Improving living conditionsNegative effects: Reduced food security in a target country when food crops are not available for local consumption One-sided distribution of benefits in favour of the investor, bureaucracy (corruption) or just some parts of the local population Distribution of benefits for just one side due to increasing input prices (land, water) Increase of local and regional unemployment Changes in availability of water resources
• Possible socio cultural impacts of FDI in land on rural livelihoods Positive Effects: Improving living conditions and sustainable development by additional income Reactivation of abandoned land Improvements in working standards Better integration of smallholder farmers (associations) Increase in civil safety and political stability due to improved living conditionsNegative Effects: Social conflicts caused by strong competition for remaining land, immigration of foreign employers and raising poverty Marginalisation of small-size land owners Reduced access to use of common lands (collecting fuel wood, wild fruits, medical plants, etc. or grazing livestock). Increase of urban poverty through emigration of local farmers
• Possible environmental impacts of FDI in land on rural livelihoods Positive Effects: Increase in environmental-friendly production◦ higher level of education◦ better technical capacities◦ Higher standards on target markets Reduction of erosion by using formerly abandoned landNegative Effects: Increase in erosion and worsen climate by deforestation and changes in land use Loss in water availability and quality Loss in soil quality by unsustainable use of chemicals. Disruption of the local ecologic systems by introducing plants or species (e.g. eucalyptus, palm trees and rubber in some areas).

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