Managing Logistics Risks in Agricultural Supply Chains along International Corridors

Jean Francois Arvis, Ian Gillson and Charles Kunaka, The World Bank

FARMD (January 2013) | World agricultural markets have fundamentally changed over the past ten years. Following almost three decades of decline, prices for many agricultural commodities have peaked in recent years and become more volatile as a result of temporary disruptions to supply and/or increased demand. This trend is likely to continue as supply pressures arise from climate change, demand for biofuels increases and the financialization of agricultural commodities (speculation) deepens. Concerns over high commodity prices, coupled with occasional food safety outbreaks, have raised interest in designing effective risk mitigation strategies among the private sector, national governments and donor agencies as risk impacts upon reliability and can push costs and price volatility even higher.

Agricultural production is synonymous with uncertainty often by virtue of its exposure to weather; the unpredictability of disease and pests; and, the seasonality of harvest and market cycles. Agriculture is also dependent on supply chains to cope with the geographical separation of inputs, farming and consumption. Agricultural supply chains comprise input supply (seeds, fertilizer, energy), production, post-harvest, storage, processing, marketing and distribution. These elements along the ‘farm-to-fork’ supply chain increasingly span national borders and involve inputs from a wide range of public and private sector participants. These participants typically support three major types of flows in the supply chain, namely: i) physical products (from input suppliers to farmers, farmers to traders, traders to buyers, buyers to consumers); ii) financial (credit, payments, insurance); and, iii) information (prices, transport opportunities).

Logistics are a critical part of these flows, and weaknesses in them are often a major source of risk in agricultural supply chains that affect the availability, timing, traceability and quality of goods. Until recently food supply performance was primarily understood in terms of transportation costs for inputs and outputs. Today the complexity of supply chains is more fully recognized and its performance also assessed in terms of reliability.

Supply chain management means addressing the reliability of the delivery process itself, especially with respect to delays and uncertainty in time, quality and availability of service and risks of interruption. All of these risks can undermine the fundamental objectives of any supply chain: to provide products of the correct quantity and quality, to the right place, at the right time, efficiently at competitive cost – and to make at least normal profit in doing so. For governments there may be additional objectives, especially for net-exporting countries if cash crops are important for export revenues or, for net importing countries, to maintain domestic food supply. In the context of low income countries, and especially landlocked ones, food logistics is dependent on international corridors over relatively long distances (1,000 km or more), which serve both intra- and extra-regional trade through local port gateways. These corridor supply chains are often very slow and unreliable by international standards both for imports and exports.

The World Bank and other institutions have recently revisited corridor supply chains and the practical policies and measures to improve their performance to connect countries more effectively to markets. The logistics on corridors depends on three pillars. The first is infrastructure, primarily road or rail linking the main economic centers and ports, as well as linking rural areas to the main international corridors, and storage. The second is the market for private logistics services. The third is the procedural and regulatory environment to move goods, especially food, internationally across borders, referred to as transit and border management. Import delays along corridors in low income regions such as Africa vary significantly from, for example, an average of one week (e.g. Southern Africa) to several weeks (e.g. Central Africa), but even more characteristically with huge variance on the time to move through the corridor in terms of lead time. Delays have typically a broad tail distribution where delays exceeding the median delay by 400 percent are not exceptional. Logistics costs supported by the consumer may sometimes exceed 100 percent the cost of trucking (e.g. West Africa).

A lack of reliability along the supply chain derives from inefficiencies in these main three areas, and the difficulties to implement the remedial actions, often across several countries.

First, infrastructural development and maintenance in low income countries poses a formidable challenge and consumes significant financial resources. In certain circumstances, washout, fallen bridges, accidents and derailments can make roads or railroads impassable. Critical links along the supply chain may be broken altogether under certain weather conditions. However this is increasingly becoming the exception as alternative corridors are available in virtually all cases. Hence the provision of infrastructure is not a major source of supply chain risk. Ports have always had infrastructure dedicated to bulk food commodities (grain). However the tendency has been to convert some of this capacity to accommodate the growth of container trade and other activities, such as silos, are also taking prime real estate in may port cities. A recent study in MENA on “The Grain Chain” shows that the efficiency of ports and grain capacities is also a concern, as boats have to wait longer than elsewhere in the world.

Storage infrastructure is an indispensable component of agricultural supply chains.  This is due to the fact that harvest normally occurs over short periods while consumption is spread over the course of a year.  Storage is therefore unavoidable while at the same time one of the major sources of risk in the supply chain.  The risk arises from losses during storage as well as the opportunity cost of tied-up capital.  In a geographically dispersed market, food prices increase as distance to market increases because transport costs increase. Therefore, the opportunity cost of storage decreases as distance to market increases. Central to storage is the fact that the price appreciation net of storage costs should equal the rate of return of holding the stock.  However, in most instances evidence points to what has been termed the “storage at a loss paradox”.  The gap between contemporaneous spot and future prices is normally less than the cost of storage.  This has the effect of forcing farmers, especially small-scale farmers, to sell their produce as soon as they harvest. Therefore, the location of a storage facility or an agricultural processing center determines if it is worthwhile for producers to sell their produce or not.  This affects all products but is even more critical for those that are highly perishable, such as food.  A whole-of-the-chain perspective is therefore critical to balancing the reliability of transport and the location and size of storage facilities.

Secondly, the provision of services is a major source of risk and more complex in the context of food logistics than elsewhere. Risks associated with logistics services are especially important for perishable agricultural commodities or for those products in which timely market delivery is a key feature. For example, risks of loss of product quality due to a breakdown in logistics are high for trade in fruit, vegetables, cut flowers, beef and fish.  They are less important for bulk traded goods such as cotton, rice, tobacco and sugar where price volatility, for example, often poses the greatest risk.

Services are typically highly fragmented in developing countries with separate providers for trucking, brokerage and warehousing instead of consolidated providers of these services as are often found in developed economies. Even the relatively large public entities typically involved in agricultural trade or the World Food program have to rely on an array of separate providers for long distance corridor logistics or regional distribution or collection. These services can be more or less efficient, but in some regions segment informality means low predictability of services losses. Relatively small and seasonal volumes as well as unbalanced volumes between exports and imports also mean shallow services markets with little competition and high rent seeking behavior. In many instances, spikes in demand for fertilizers or imported goods coincide with increases in prices for logistics services sometimes by up to 50 percent. Trucking reform would be part of the solution to lower costs.

Distribution services within economic centers of the corridors are typically larger and better quality than providers in rural areas. For farmers and traders in developing countries, the greatest sources of logistics risks are poor roads, together with low quality, high cost and infrequent trucking services. Also important are weak communications infrastructure and resultant deficiencies in timely market information. Lack of access to services and information implies a high reliance on traditional intermediaries with significant impact on farm gates prices. Recent examples, including in India, show that cell phones can help farmers better manage their access to markets, services and intermediaries.

Thirdly, trade and transit facilitation is another area of concern. The corridor supply chain is almost everywhere a series of duplicated clearance procedures by customs and border agencies at each land border and in the country of destination. This sequence explains much of the delays and markups over transportation costs. It also offers opportunities for rent seeking behavior. As compared with non-food merchandise, trade in grains and other food items are subjected to more regulatory control (e.g. health and SPS regulations) as well as other non-tariff measures (e.g. licensing). However, imports and exports are often organized by large institutions on a recurring basis and with high volumes, and so have developed experience to manage this red tape and limit the risk of bureaucratic interruption along the supply chain. The complexity is in fact greater for cross-border flows by small traders in their attempts to respond to local opportunities to trade in food, where unpredictability of clearance and import unfriendly behavior can create serious delays and losses even over relatively small distances (a problem well known for garden producers in Central Asia and Sahelian countries). The paradox may be that trade between neighboring countries in a product can be more complex than that in same produce with another continent.

Despite these significant sources of risk there are important changes being observed in agricultural supply chains that hold the promise of improved efficiency.

First, private sector initiatives are an important starting point. Partnerships between logistics providers (freight forwarders, airlines, shipping lines) and agricultural entrepreneurs lie at the origin of diversification into higher value agricultural exports (e.g. cut flowers, beef, mangoes) being shipped around the world. Stronger professional organization is indispensible to addressing market weaknesses and to upgrading quality, and building longer term commercial relationships with institutional food shippers helps to address some of the concerns relating to the availability of transport or transport price volatility. The private sector is also key to the design and implementation of government sponsored facilitation initiatives. For example, corridor arrangements such as the Mombasa corridor in Kenya and the greater Mekong corridors in Asia have all set up private sector fora.

Governments also have an important role in conditioning logistics risks through establishing the domestic and international policy frameworks in which these services operate, including the design and implementation of transport sector policies, pricing, investment incentives and institutions. Through simplifying and harmonizing trade procedures and regulations,  Governments can reduce the number of ‘choke’ points at which risks from theft or delay of agricultural consignments may occur.  Policy consistency is also critical in giving the right signals to the private sector to invest in systems and practices that minimize risks along the agricultural supply chain.

Finally, donors are also helping to reduce logistics risk through supporting the development of trade infrastructure including the “software” (regulatory) dimensions of transport and trade facilitation projects. For example, the World Bank’s Trade Facilitation Facility is a US$53 million trust fund available to LDCs and regional organizations to help developing countries’ enhance their competitiveness by strengthening the quality of their trade facilitation systems. It focuses on providing support to project implementation in areas such as border management, institutional development, trade procedures, logistics services markets; gateway infrastructure; and, international trade agreements.

References

Arvis, J.F., R. Carruthers, G. Smith and C. Willoughby (2011), Connecting Landlocked Developing Countries to Markets: Trade Corridors in the 21st Century, World Bank, Washington, D.C..

Jaffee, S., P. Siegel, and C. Andrews (2008), ‘Rapid Agricultural Supply Chain Risk Assessment: Conceptual Framework and Guidelines for Application’, World Bank. Washington, DC.

Kunaka, C. (2011), ‘Logistics in Lagging Regions: Overcoming Local Barriers to Global Connectivity’, World Bank, Washington, D.C..

Lampietti, J., S. Michaels, M. Battat, D. Erekat and A. de Hartog (2012), ‘The Grain Chain: Food Security and Managing Wheat Imports in Arab Countries, World Bank and Food and Agriculture Organization of the United Nations, Washington, D.C. and Rome.