Recipe for disaster

Print edition : February 24, 2012

AT A SUPERMARKET owned by Walmart and Bharti Enterprises in a joint venture in Zirakpur, Punjab. Concentration of global food supply chains in the hands of a few companies gives them the power to set terms, conditions and prices of the produce they acquire from farmers.-AJAY VERMA/REUTERS

The market power of MNCs in the global food system has implications for both producers and consumers and poses major threats to global food security.

IT is clear that the raging policy debate on allowing multinational companies a greater role in the Indian retail sector, particularly food retail, is not yet over. Already Commerce Minister Anand Sharma has declared that the decision to hold back on liberalising rules of foreign direct investment (FDI) in this sector following the political backlash is only to provide breathing space for the government. It is only too likely that the United Progressive Alliance (UPA) government will seek to push through this reform at some point over the next two years of its term.

This makes it all the more important for Indian citizens to become aware of the extent of concentration and control of multinational companies in global food distribution, and the implications of this for both producers and consumers of food. These aspects are drawn out in some recent studies that deserve much more public attention.

A new report produced by Timothy Wise and Sophia Murphy (Resolving the Food Crisis: Assessing Global Policy Reforms since 2007, GDAE and IATP, January 2012) makes several interesting points about how the global food crisis is related not just to medium-term supply factors that reflect the effects of more open trade and the policy neglect of agriculture, but also to the biofuel subsidies that have diverted grain acreage and production. Recently, financial speculation too has played a role in pushing up prices of food. But Wise and Murphy also highlight a feature that is often ignored in policy discussion on the food crisis: market power in the food system.

They note: As agricultural, energy, and financial markets become more integrated on a global scale, the power of transnational firms within the global food system grows. This poses significant threats to global food security, despite the advanced production and communication systems these firms bring. As a result, policies are needed to curb the market power of transnational companies in the food system. Unfortunately, there are very few such initiatives. Instead, the expanded interest in public-private partnerships and the continued commitment to the expansion of industrial agriculture lead in the opposite direction. (Wise and Murphy, 2012, page 33.)

One other voice that has raised this issue in the international policy discussion is that of Olivier de Schutter, United Nations Special Rapporteur on the Right to Food. A Briefing Note on Addressing concentration in food supply chains (December 2010), points out: Disproportionate buyer power, which arises from excessive buyer concentration in food supply chains (among commodity buyers, food processors and retailers), tends to depress prices that food producers at the bottom of those chains receive for their produce. This, in turn, means lower incomes for these producers, which may have an impact on their ability to invest for the future and climb up the value chain, and it may lead them to lower wages that they pay the workers that they employ. There is thus a direct link between the ability of competition regimes to address abuses of buyer power in supply chains, and the enjoyment of the right to adequate food.

These forms of market power and their effects are elaborated in a paper by Aravind Ganesh on The right to food and buyer power ( German Law Journal, Volume 11, Number 11.) Aravind Ganesh points out that excessive buyer power harms both ends of the food distribution chain, the (usually small) direct producers and the final consumers.

The extreme concentration in the middle of global supply chains is already a matter of major concern. For example, Ganesh notes that in 2008 the World Bank estimated that globally there were around 25 million coffee growers and 500 million consumers. But only four firms accounted for nearly half of the coffee roasting and trading industries. For tea, three companies controlled over 80 per cent of global distribution. In commodities as varied as grain, soyabean and other oilseeds, sugar and cocoa, a few large companies dominated the processing and distribution globally. In many cases, such as Nestle and Parmalat in the Brazilian dairy industry (where they now account for 53 per cent of processing), these companies came to acquire their dominant market power allegedly by driving out farmers' cooperatives, which were effectively forced to sell their facilities to the large players.

Such concentration gives these large companies considerable power to set the terms, conditions and prices of the produce they acquire from farmers. This can even deprive farmers of the ability to earn enough income to feed their households. Ganesh notes that studies have shown that the practice of dominant U.K. [United Kingdom] groceries retailers of passing on to Kenyan producers the cost of compliance with the retailers' private standards on hygiene, food safety and traceability has resulted in the moving away of food production from small holders to large farms, many of which were owned by exporters, as well as the acquisition of exporters of their own production capacity. In short, farmers are being excluded from global grocery supply chains, thus severely damaging their incomes. (Ganesh 2011, page 1196.)

Ganesh cites several examples of cases where the competition and anti-trust authorities in different countries have been forced to take on multinational firms for their collusive practices.

In South Africa, a milk cartel had to be investigated for colluding to fix the purchase price of milk and imposing contracts on small dairy farmers to supply their total milk production without retaining anything even for household consumption. Another investigation was launched into supermarkets denying small producers access to retail shelves as a result of buyer concentration.

Even in Asia, in places such as South Korea, Taiwan, China and Thailand, competition authorities have brought actions against dominant multinational buyers like Walmart and Carrefour for various kinds of abusive conduct. These include strategies that adversely affect small producers in particular, such as refusal to receive products, unfair price reductions, unfair passing on of advertising fees to producers, charging improper fees, and unreasonable penalties for supply shortages. In all these cases fines had to be imposed on these companies, but in the absence of strict guidelines and constant regulatory monitoring, it is likely that such behaviour will continue.

Oliver de Schutter has argued that it is, therefore, necessary for competition authorities within countries as well as more global legal regimes to be in place to prevent such rampant abuse of power. Regulation and control are necessary to prevent just some of these tendencies of large retailers:

directly or indirectly imposing unfair purchasing or selling prices or other unfair conditions;

limiting production, markets of technical development to the prejudice of suppliers;

applying dissimilar conditions to equivalent transactions with other trading partners, resulting in those parties being placed at a competitive disadvantage;

making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations that have no connection with the actual subject of such contracts.

Clearly, framing such regulations and enforcing them is a mammoth enterprise. But it must be done in all situations where the concentration of market power in the hands of a few is leading to such malpractice.

On the other hand, it is obviously much better to be able to avoid such market concentration in the first place, especially for something as essential as food. This makes it all the more important to formulate and implement a clear rejection of the proposal to bring in multinational retail in the Indian food market.

ONLINE

"Resolving the Food Crisis: Assessing Global Policy Reforms since 2007", GDAE and IATP January 2012,

"Addressing concentration in food supply chains", December 2010,

"The right to food and buyer power"(German Law Journal, Volume 11 Number 11)

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