Energy Scarcity, Food Supply Chain Transformation, and Poverty Reduction in the Emerging Economies: the Case of Brazil, China, and India

Lead Research Organisation: Int Food Policy Research Inst
Department Name: Development Strat and Governance Div

Abstract

Rational. Three existing knowledge gaps motivate this study. First, there has been little research on linking energy, transformation, and poverty reduction in the developing countries. Second, there has been little research analyzing energy costs in the various segments of the food supply chains, differentiating over products, tracing both patterns in energy intensity by segment as well as the impacts of these costs on net incomes of actors. Third, there has been little empirical research empirically linking energy policy and public energy system investments with energy costs and performance in food supply chains in developing countries.

Objectives. 1) to develop an integrated conceptual framework for modeling the relations among three interrelated factors, transformed versus traditional food supply chains; energy costs from electricity and fuel; and net incomes of supply chain participants and food prices; 2) to apply the framework to analyze horticulture and dairy supply chains in China, India, and Brazil, to assess how energy costs are generated and affect behavior in the segments of the supply chain and what the implications of these are for food costs to consumers and incomes to producers; and 3) to formulate policy pathways for moving towards more optimal energy use practices that contribute to supply chain development and reduction of poverty.

Key Research Questions. What determines the patterns and formation of energy costs along the supply chains? How do these energy costs affect the transformation of the value chains? How do energy costs and access constraints condition small-scale actors' participation in transformed food value chains? How do energy costs in those chains impinge on the welfare of the poor? What are the patterns of energy use indicators of the value chains? Via what innovations do supply chain actors cope with energy costs and seek energy efficiency? How do technology changes used to improve access to transformed value chains translate into energy intensity and energy efficiency changes in the supply chain? What is the impact of energy policies and public investments on energy intensity and efficiency in those chains? What are the distributional and food price consequences of the above, and what are various scenarios? Is there a match or mismatch between energy policies and investments and "hot spots" in the supply chains' energy use? Do the policies lead to energy savings hence cost savings and competitiveness for the farms and firms?

Data and Method. 1) Inventory per country the energy policies and public and private-sector investments related to energy costs and access for all segments of the value chains studied. 2) Inventory and "map" the different value chains for the two products, in two study provinces/states. 3) Collect detailed data in "stacked surveys", with a representative sample survey in each segment of the value chains, as well as supplemental case studies, as discussed above. 3) Analyze the data from all the segments of the value chain surveys. 5) Use the findings from step four, arrayed as parameters in simulations at different levels to model the impacts of energy policies and investments on energy costs, intensity, efficiency, and energy cost burdens of the poor.

Output and Impact. Eight papers and four policy briefings will be prepared. The study will provide evidence base and analytical tools that facilitate policy makers and other decision makers to make more informed decisions and evaluate their alternative options with respect to energy use and management in agri-food system for the enhancement of its performance that are critical to the poor. Lessons learnt from the three emerging economies would have implications for the low income countries in the world. The ultimate beneficiary is the rural poor in the developing countries who engage in the agricultural sector and whose livelihoods depend on the performance of the agri-food system.

Planned Impact

This study has strong potential for impacts via informing policy change, to effect: (1) an increase in energy efficiency and reduction of energy costs in food supply chains; this can come about by our identifying policies and investments by government as well as private sector and farmers, that save energy or increase its efficiency of use; (2) a reduction of food price inflation; this can be done via identification of ways to increase efficiency of energy use in the supply chain; Discovering energy cost's specific role among various supply chain costs can lead to the impact of enabling energy policy change to be brought to bear on food security; (3) a reduction of poverty and increase in incomes of small-scale actors along the supply chain by adapting (1) and (2) to identification of policy and investment approaches that will lower these costs for small-scale actors in the supply chains; (4) indirectly affect energy cost and efficiency in supply chains by identifying the determinants of technological and structural transformation of food value chains and the variants of such change that use energy most judiciously. These impacts are important in an era of high energy costs, intense public debate about energy policy in general and the relation of energy costs and food prices in particular, and of public concern with high costs in supply chains and thus worries about inefficiency driving food price increases.

At the same time, there are growing concerns about the exclusion of the poor from rapidly transformed agri-food supply chains. This work will inform "decision nodes" in policy and public and private investment in the energy system. These policies are in great flux and debate today and energy investments in rapid development. Our work can help those policies and investments to leverage improvements in the supply chains for food security, while helping the poor to benefit as producers along the chain and consumers at the end of the chain from lower energy costs. This would modify the response to energy prices. This could be both through direct policy and investment in energy access, but also in helping the poor make investments in micro-measures to increase energy efficiency in their productivity activities in the segments of the supply chain.

The outputs of this study will be communicated to policy makers and other development partners through project meetings, publication of policy briefs, media and seminars in an effective and timely manner. The communication channels that exist within IFPRI, which receive a high degree of visibility, will be exploited. In addition, it is worth highlighting that, the Co-PI organizations, Renmin University, University of San Paulo and India Statistical Institute are uniquely well-positioned to influence the agricultural and food policies in Brazil, China, and India, respectively.

The study will provide evidence base and analytical tools that facilitate policy makers and development agencies make more informed decisions and evaluate their alternative options with respect to energy use and management in agri-food system for the enhancement of its performance that are critical to the poor. Lessons learnt from the three emerging economies would have implications for the low income countries. The ultimate beneficiary of this proposed research project is the rural poor in the developing countries who engage in the agricultural sector and whose livelihoods depend on the productivity and performance of the agri-food system. The impact of this proposed study will be even more significantly enhanced if it eventually leads to a larger scale research consortium involving low income developing countries. Room for expansion of the work is considerable and the areas where the framework and modeling tools developed in this study can be applied to are ample.

Publications

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Description This is the first project that empirically investigates the share of direct and indirect energy costs along the dairy and potato value chains in Brazil, China, and India. We find energy costs accounting for a substantial share of total value chain costs. We show that off-farm components of the value chain have a higher share of total energy costs while previous studies mainly focus on the energy costs on the farm level. The energy costs on the farm and off-farm in the food system are correlated with the degree of "transformation" of the value chain and its segments, such as capital intensification and geographic lengthening. With energy costs and food costs found generally correlated in the macro literature, the analysis here allows the policymakers to unpack the black box of energy costs in the dairy and potato sectors and ascertain where energy vulnerability challenges are and energy economizing opportunities may best pay off for overall national food security.
We calculate the five indicators of energy cost: i) the shares of direct energy costs in total costs of the value chain; ii) the shares of indirect energy costs in total costs of the value chain as a lower bound for indirect energy costs, given its prominence in the debate about energy in agriculture; iii) the total of the above shares to provide a rough lower bound idea of how important energy is in the whole value chain; iv) the share of direct energy from off-farm segments which is the first time in the literature in any developing country where this figure has been calculated for food value chains; and v) the share in direct energy costs of the value chain of direct energy costs form the farm to compare with the off-farm component as the debate about energy in agriculture tends to focus nearly exclusively on on-farm costs. The three key findings of the above indicators are summarized as following:
First, we presents a point that has never been documented empirically in developing countries in general - the importance of energy costs in agri-food value chains. For liquidity milk, direct energy use averages out to 5% of the costs of the value chain, with the indirect energy use from fertilizer and other averaging 29%, fully 34% of costs of the value chain. For potatoes the shares are 17%, 8%, and 25% for the overall. These findings are based on 6 detailed value chain stacked surveys for dairy and potato in Brazil, China, and India. These figures might be considered lower bounds for the importance of energy in agri-food value chains in general in emerging economies since, on average, only less than a third of food expenditures are on grains, and the rest on perishables such as meat, fish, dairy, fruits, vegetables as well as processed foods. It may be that this has not been explored in the literature to date because of the prevailing image of value chains as based upstream in farms that are little mechanized and selling into midstream and downstream segments that are still short in distance and peopled with many small actors using little mechanized technologies. The reality of the food value chains, which supply two key foods - dairy and potatoes - to large cities, has changed over the past decade: (1) they now start upstream from commercialized farms, even in the case of very small farms, which have undergone widespread mechanization as wages have risen and machine costs have gone down, as fertilizer use has become ubiquitous and substantial, as irrigation has extended the seasons; (2) these same supply chains now include substantial use of modern, energy-using cold storages, of medium and large energy consuming milking machine, of medium and long distance transport by medium and large trucks and boats, and retailers using electricity and motorized transport.
Second, while the debate about energy in agriculture in developing countries focuses on the farm segment, our research taking a value chain perspective shows that this focus neglects the important role of the off-farm components (in the midstream and downstream, post-farmgate) in energy cost formation in the value chain, and ultimately, of food prices for consumers. This is the first time this point has been made with survey data to support it in developing countries. In the dairy VCs, the share of off-farm components moderately exceeds (73% to 27%) that of the farm for direct costs, and for potato VCs, exceeds (80% to 20%). Of course, this point is moderated but not contradicted when the indirect costs of fertilizer- embodied energy costs are added to the farm segment's share; however, it is interesting that doing so merely brings to equality the role of off-farm and farm components in total energy costs in the value chains of rice, and still leaves the off-farm components dominant in energy-cost formation for potatoes. Importantly, two conditioners of the relative share of the off-farm segments stand out. These are: (1) energy from transport (hence the cases where the supply chains are geographically long - where the farm area is relatively far from the consuming city show high off-farm energy shares); (2) cold storage costs for milk and large processor energy costs.
Third, farm segment energy costs are composed of (1) direct energy costs and (2) indirect energy costs. We show the ratio of (2) to (1) to test the hypothesis coming from the developed country literature (e.g., USDA 2006) found that the indirect energy use (via chemical fertilizer) is about 2:1 times the direct energy use on the farm, and the total of direct plus indirect (via fertilizer & other chemicals) is 16% of total farm costs in the U.S.). Interestingly, the average of the dairy and potato cases in emerging economies comes out to the higher ratio of indirect to direct as in the US. That dairy has a higher ratio than potato can be explained by the higher fertilizer intensity of potato and the greater machine intensity of potato; in the US there would also be such variation around the average. Moreover, it is interesting that the total energy share for the dairy and potato cases in emerging economies (17%) is even higher than the US case overall (16%). Although the average sizes of the farms are smaller than those in the US, the energy share in farm costs is roughly similar; that is a testament to the capital-led intensification of the farms from emerging economies in the past decade or two. There is obviously substantial variation over the zones but that is mainly explained by differences in mechanization and irrigation costs, with the highest mechanization rates that were discussed in the text in the specific cases section.
Exploitation Route This is the first project showing empirically the share of direct and indirect energy costs in the agri-food supply chains in emerging economies, or for that matter, in developing countries generally. We show a substantial share of total value chain costs come from energy costs. While our reports have focused on energy costs on the farm, we show that off-farm components of the value chain/food system have a higher share of total energy costs.
We showed that the energy costs on the farm and off-farm in the food system are correlated with the degree of transformation of the value chain and its segments, such as capital intensification and geographic lengthening. We noted that agri-food value chains in the three largest emerging economies are transforming, with capital intensification per segment, with geographic lengthening, and in the more advanced cases, with consolidation and scale increase per segment at least in the off-farm segments. Moreover, de-seasonalization is occurring in both dairy (with processed milk) and potatoes (with irrigation and cold storage) and potatoes and other perishables (with cold storage). If these trends continue, reliance on energy along the value chain will be increased. As for, de-seasonalization can increase the vulnerability of food supply chains to energy cost shocks - although de-seasonalization can be offset by economies of scale and mitigation measures to save energy along the chain.
While energy costs and food costs are generally correlated in the macro literature, the analysis here allows policymakers to unpack the black box of energy costs in the food sector and ascertain where energy vulnerability challenges are and energy economizing opportunities may best pay off for overall national food security.
Sectors Agriculture, Food and Drink,Energy,Government, Democracy and Justice,Manufacturing, including Industrial Biotechology,Other

URL http://resakss-asia.org/value-chain-energy-project
 
Description The project offers insights in the mechanisms that form food prices - value chains - on how and specifically to what extent energy costs determine those prices, compared with other factors. Discovering energy cost's specific role helped lead to the impact of enabling energy policy change to be brought to bear on food security. The findings from this work helped to inform "decision nodes" in policy and public and private investment in the energy system. These policies are in great flux and debate today and energy investments in rapid development. Our work helped those policies and investments to leverage improvements in the supply chains for food security - while helping the poor to benefit as producers along the chain and consumers at the end of the chain from lower energy costs. The findings of this study have communicated to policy makers and other development partners through project meetings, policy briefs, media and seminars.
Sector Agriculture, Food and Drink,Energy,Government, Democracy and Justice,Manufacturing, including Industrial Biotechology,Other
Impact Types Cultural,Societal,Economic,Policy & public services