Folie 1

1
An Analysis of Business Relations in the German
and Polish Fruit Supply Chain
Kai Maack University of Hannover 15th Annual
Food Agribusiness Forum, Symposium and Case
Conference Re-Inventing the Food Chain New
Products, Consumers and Markets June 25-28,
2005 in Chicago, Illinois
2
Fig. Imports of strawberries to Germany
3

• 1 Introduction
• Poland is the most important importer
• 1-5 of the berries were produced in Germany
• German production of berries are not feasible
• Procurement mainly on the spotmarket
• This study
• gives an missing overview of the market
  structures of the German fruit processing
  industry and of the Polish berry market.
• analyses the business relations in the
  procurement of berries

4

• Outline
• Introduction
• Theoretical background
• Structures and developments
• Analysis of business relations
• Conclusions

5
Theoretical background
6

• 2 Theoretical background
• Transaction cost economics
• Principal Agent-Theory
• Coase theorized that by internalizing
  transactions, governance costs could be reduced
  at times while, at other times, the market has a
  valuable role to play in a firms ability to
  compete.
• In the 1970s Williamson used Coases theories as
  the basis for transaction cost economics, adding
  to them human elements such as opportunism and
  bounded rationality

Supplier
Buyer
Transaction
7
The Organisational Failures Framework
Human Factors
Environmental factors
Bounded Rationality
Uncertainty
Information impactedness
Small numbers
Opportunism
Source Williamson, 1975
8
The continuum of governance structures
9

• Structures and developments

10

• 2 Structures and developments
• Fruitsector in Poland before 1989
• During socialist period 75 of land was in
  private sector
• Private farmers dominated fruit and vegetable
  production
• In 1988 140 horticulture cooperatives had a very
  strong position on the home market.
• Food-processing plants belonged to so called
  socialized sector (which included cooperatives
  and state-owned companies)
• Distribution networks consisted both of private
  and socialized sector

11
Important relations in the Polish fruit supply
chain
Intermediaries
12

• Processing industry in Germany
• The value of production of canned fruits, jam and
  fruit preparations amounted to about 1.1 bn EUR.
  Scarcely half of the amount was finished products
  on the basis of berries.
• Total supply needs are estimated to be
  approximately 130,000 t per year.
• Due to structural transformations, the number of
  individual manufacturers of jam and canned fruits
  has fallen in recent years to approximately 28 in
  the year 2002. Two large manufacturers unite
  approximately 70 of the jam market.
• Different quality requirements The highest
  quality is needed to produce canned fruits,
  whereas fruit preparations are subject to less
  restrictive quality requirements

13
Production of canned fruits, jam and fruit
preparations
14
Import of berries for processing
15
Share of Berry Costs in Average Value of
Production
16

• Fruit processing industry in Poland
• Polish food processing industry has been
  transferred successfully to private property.
• This sector includes between 1400 and 1500
  processing plants.
• The most dynamic development was observed since
  mid 90s due to increased foreign investment.
• Traditional fruit and vegetable processing in
  Poland is small-sized
• In the Polish cold freezing industry about 200
  enterprises are active, of which fewer than 100
  enterprises freeze fruit.
• Main problems
• shortage of domestic capital
• crop dispersion
• lack of cold storage

17

• Intermediaries
• 3800 companies for which fruit and vegetable
  trade is the main activity.
• 300 exporting companies which compete strongly.
• Many traders organize collecting points.
• High bargaining power.
• Sales during the year to the German or Polish
  processing industry.

18

• Production sector
• The greatly dispersed structures of the land and
  crop rotation remained excluded from large
  changes.
• The cultivation of berries plays an great
  importance, with a share of about 40 of the
  entire fruit cultivated area.
• Strawberries dominate with 40-50, black
  currants (30-40) and raspberries (approx. 15).
• From about 800,000 farms, more than 90
  cultivate an acreage under one hectare and only
  about 2,000 enterprises own modern plants
  (Makosz, 2003).

Source GUS, 2003 and IERiGZ, 2002
19

• The border between self-sufficiency and market
  production is still very low.
• Difficult financial situation of most Polish
  farms
• Low use of inputs, in particular pesticide and
  fertilizer
• Heavy fluctuations in price and yields
• Lack of market information
• Low integration of small farms to vertical
  chains
• Low, but increasing horizontal cooperation
• Due to the difficult financial situation of most
  Polish farms with a low use of inputs, a strong
  reduction of the yield fluctuations or increase
  of the productivity are not to be expected in the
  foreseeable future (Makosz, 2004).

20
Producer prices and acreage of strawberries
21

• Specific characteristics of the cultivation of
  strawberries
• The cultivated area changed very markedly, often
  within a short time, between 40,000 and 65,000
  ha, with strong fluctuations of the yields.
• Profitability varies sharply from year to year.
  The degree of cost coverage varies from 40 to
  170
• Ideal and almost exclusively used variety is
  senga sengana.
• This variety is characterized by low yields,
  small fruits und a low resistance to diseases.
• Its share of the entire acreage of strawberries
  has fallen in the last 5 years from 80 to about
  60.
• Polish farmers are aware that fresh table
  varieties attract higher prices
• High initial investment and an unproductive first
  year of cultivation

22

Farmers
Industry

• Small-sized farms
• Low horizontal cooperation
• High uncertainty in price and yield
• Increasing specificity
• High initial investment
• Lack of market information

• High uncertainty in price and amount
• High strategical meaning
• Increasing specificity
• Increasing quality requirements

23
Analysis of the business relations
24

• Analysis of the business realtions
• Farmer Polish processing industry/
  intermediaries
• The main distribution channels are usually
  trading companies.
• Farmers are reluctant to build up long-term
  relationships.
• Industry are seen as unstable partner (Halicka,
  2001).
• Payment delays is one of the biggest problem.
• Hold-up problems.
• Larger fruit-growing producers tend to sell
  berries directly to the processing industry.
• Many berries producers prefer to sell to traders
  since transport costs are lower and they receive
  earlier their payment.

25

• German processor Polish processing industry/
  intermediaries
• German industry procure their berries almost
  exclusively from traders or Polish processing
  industry.
• Procurement during the year
• Purchases mainly on spotmarket

26

• German processor Polish Farmers
• German industry tend to increase the direct
  relations to the farmers.
• Also their contractual procurement.
• Try to increase the control and influence in the
  cultivation.
• Better coordination of the time scheduling
  relating the deliveries.
• One indispensable condition is a minimum
  quantity!

27

• Example for a closer coorperation
• In the late 90s, a German company and an
  association of 150 farmers have set up a
  contractual agreement
• This cooperation was initiated the German fruit
  processing enterprise.
• Cultivation of the strawberry variety senga
  sengana were agreed upon firmly for the entire
  4-year contract period.
• Average yield increased by over 10t/ha, through
  the support of the industry with the credit
  intake, the common use of machines and consulting
  for cultivation.
• This example shows very obviously that a closer
  cooperation can increase the productivity
  considerably and that such a cooperation can be
  profitable for both sides.

28

• Conclusion
• Berries are an important raw material for the
  German processing industry
• The procurement of berries is characterized by an
  uncertain supply situation and rising procurement
  costs for years.
• The berry production in Poland is characterized
  by highly fluctuating prices and yields, unstable
  production conditions, high level of competition
  and problems with marketing of their products.
• A vertical cooperation may solve some of these
  problems.
• German industry is interested in a closer
  cooperation.
• One indispensable condition is a minimum
  quantity!

29
Thank you for your attention!
30
Distribution channels of fruit and vegetable
producer groups, thier change after access to the
group and their share of contractual sales (in )
Source Lemanowicz, M., 2004
31
Producer groups

• At 13 May 2005, the database of the Agency for
  Restructuring and Modernisation of Agriculture
  contains
• 30 fruit and vegetable producer groups granted
  preliminary recognition,
• 8 recognised fruit and vegetable producer
  organisations

32

• Specifics in the Agricultural sector
  Perishability and high asset specificity (Masten,
  2000)
• Agricultural transactions display a broad range
  of governance structures, including the
  location-specific nature of the investments
  required and the temporal specificities
  associated with the perishability of agricultural
  products (Walker and Weber, 1987).

33

• Institutional strategies for the polish fruit
  sector
• Information system
• Quality monitoring
• Financial support
• Horizontal cooperation

34

• Evaluation of the German industry to a close
  vertical cooperation
• Increasing interest in a close vertical
  cooperation
• Certain procurement
• Reliable calculation basis
• Exertion of influence in the cultivation
• Better coordination of the time scheduling
  relating the deliveries
• Reducing of transaction costs
• One indispensable condition is a minimum quantity!