OECD Final report on private standards and the shaping of the agro-food system

by Linda Fulponi, July 2006

Summary

1. The study examines the role of private voluntary standards in shaping the agro-food system, with a focus on product sourcing. It discusses the main economic incentives for the development of such standards as well as their likely evolution from the perspective of lead retailers in OECD countries. It also provides information on the views of agricultural producers regarding to the importance of private voluntary standards for market entry and effects on revenues, competitiveness, farm efficiency worker safety and the environment. The information presented is based on interviews and surveys of lead retailers and a survey of farmer organizations in OECD countries.

2. The study identifies three key developments in private standards schemes in the food sector over the past decade: 1) a move to voluntary management systems in the food industry for the monitoring of product and process attributes; 2) the emergence of coalitions of firms for setting private collective voluntary standards and 3) an increased use of private standards in the context of global business tobusiness (B2B) practices.

3. Results from interviews with retailers suggest that the development and use of private standards schemes is closely linked to the economic environment as well as institutional and legal frameworks in which the firms operate. Among the main factors characterising the economic environment are the strengthening of consumer demands and expectations regarding food, in particular food safety and to some extent production methods affecting the environment, labour conditions and animal welfare. The interviews revealed the reasons for the development of private standards, whose compliance can be verified through third-party audits and certifications. The most important among these include increased competition among retailers for consumer spending as well as a move to reduce in-house monitoring and inspection costs and an increase in product sourcing across the globe. Firm reputation, in terms of food quality and safety was voiced as a key concern of retailers. Failure to meet consumer expectations, in particular for food safety, was viewed as damaging to firm reputation, which in turn could lead to a loss in earnings and consumer loyalty.

4. Institutional and legal frameworks in which firms operate were also considered to be an extremely important determinant in developing private standards schemes  hich not only ensure compliance with given food safety regulations but also provide a margin of defence against possible outcome failures. Thus the development and use of private standards on a B2B basis with emphasis on process management were seen to correspond both to the importance of reputation as well as to the requirements imposed by the new food economy.

5. As the legal framework affects all firms and no firm is exempt from the possibility of a food safety failure, lead firms expressed the view that food safety should be a non-competitive issue. In this perspective, co-operation on food safety was seen as the first issue to be tackled through systematic cooperation in the development of private standards. Harmonization of standards to both facilitate sourcing and reduce transactions costs for buyers and suppliers was also viewed as an important motive for initiating cooperation among retailers.

6. The first effort in relation to the development of food safety standards was the formation of the EurepGap standard by a coalition of European food retailers (Eurep). This was followed by the establishment of the Global Food Safety Initiative (GFSI) which set out required criteria for the development of private standards which are then benchmarked by the group. The standard set up by Eurep refers only to primary production (GAP=Good Agricultural Practices), while the benchmarked standards of the GFSI also include standards for processed goods and retail distribution practices in addition to those for agricultural products,.

7. The study found that for agricultural food products the private standards required by retailers focussed above all on the management process used to achieve a given outcome in addition to the traditional product control. These procedures, coupled with reporting requirements, make private standards more demanding than government requirements. Interview results also suggested that private standards would likely continue to increase in terms of food safety along with technological improvements and harmonization efforts in other areas are likely. Social and labour conditions of workers were seen as the next most important issue to be tackled in co-operation between firms in the food sector.

8. Survey results of farmer associations confirmed the high emphasis on food safety but also on other production process characteristics, particularly agri-environmental practices. Meeting private standards was considered a condition to do business with both manufacturers and retailers. However many responses noted the overlap of requirements among standards and expressed the wish for harmonization among standards. The reported effects of standards on income and environment were ambiguous. However numerous responses suggested that meeting supply logistics requirements in terms of delivery quantities and timing was also an important variable in securing market entry for many downstream buyers.

9. Overall the study finds that private voluntary standards schemes can contribute to improving food system efficiency so as to deliver and ensure specific product and process attributes at reasonable cost to consumers. Nevertheless, these standards may also be exclusionary for certain producers. Compliance with private voluntary standards schemes may exclude those producers who, due to lack of potential scale economies or otherwise can not easily meet the standards. requirements and remain economically viable. The study also notes that this issue may potentially be more important for small holders in developing countries, which must also contend oftentimes with a lack of well functioning institutional and physical infrastructure services. This development is not, however, exclusively due to private standard schemes, but is likely to be part of general trends in industrial organisation (e.g. concentration, search for scale economies or new ways of doing business) which are occurring in all sectors of the economy.

Full report available at http://www.olis.oecd.org/olis/2006doc.nsf/43bb6130e5e86e5fc12569fa005d004c/4e3a2945ffec37eec12571bc00590ce3/$FILE/JT03212398.PDF