Options for Improving the Sustainability of
Coconut Cultivation and Processing
in El Salvador:
A Commodity Chain Approach
Ruben van den Broek
Wageningen University
June 2004
TABLE OF CONTENTS
CHAPTER 1BACKGROUND
1.1Introduction 1
1.2 Research Objectives 2
1.3Theoretical Framework 2
1.3.1 Barriers to Entry and Rent 2
1.3.2Governance 3
1.3.3Different Types of Commodity Chains 3
1.4Methodological Framework 4
1.4.1Global Commodity Chain Approach 4
1.4.2Life Cycle Analysis 5
1.4.3Quality Chain Model 6
1.4.4Health Risk Assessment in Life Cycle Analysis 7
1.5Structure of this Study 7
CHAPTER 2COCONUT CULTIVATION
2.1Technical Characteristics 8
2.2.Cultivation of Coconut 9
2.3Processing of Coconut 13
CHAPTER 3COCONUT CULTIVATION IN EL SALVADOR
3.1Location 16
3.2Markets 16
3.3Institutional Framework 17
3.4Costs of Production 17
3.5International Trade 21
CHAPTER 4THE COCONUT COMMODITY CHAIN IN EL SALVADOR
4.1JOBAL 22
4.2Commodity Chain Analysis 22
4.2.1The Structure of the Commodity Chain for JOBAL 23
4.2.2Timing and Time Allocation of Activities 25
4.2.3 Decomposition of Earnings 26
4.3Life Cycle Analysis 28
4.3.1 Input-Output Analysis 28
4.3.2 Environmental Profile 29
4.3.3Decomposition of Costs 30
4.4Quality Chain Analysis 32
4.4.1Technological Options for Quality Improvement 32
4.4.2Constraints for Quality Improvement 33
4.5Health Hazard Analysis 34
CHAPTER 5 DISCUSSION
5.1Improving Sustainability 36
5.2Policy Recommendations 37
5.2.1Economic Sustainability 38
5.2.2Social Sustainability 40
5.2.3Ecological Sustainability 41
5.3Technological Options 42
CHAPTER 6SUMMARY AND CONCLUSIONS
5.1Summary 45
5.2Conclusions 47
5.3Recommendationsfor Further Study 49
References 50
APPENDICES 51
Appendix APrice of Coconuts and Coconut Products 52
Appendix BInput Costs for Coconut 55
Appendix CInternational Trade 57
Appendix DQuestionnaire used for Focus Group Meeting with JOBAL 60
Appendix E Calculation of Value Added 62
Appendix FTables of Value Added of Various Policy Options 63
LIST OF TABLES
Table 1. Characteristics of the Different Types of Coconut Palm. 9
Table 2. Planting Distances of the Different Types of Coconut Palms. 10
Table 3. Summary of the Market for Coconut Products in El Salvador. 17
Table 4. Input Costs per Hectare (US dollars). 19
Table 5. Time Allocation Table for JOBAL. 25
Table 6. Decomposition of Value Added for JOBAL ($). 26
Table 7. Input-Output Analysis for Coconut. 28
Table 8. Resources-Emissions Analysis for Coconut. 30
Table 9. Decomposition of Input Costs for JOBAL (%). 30
Table 10. Quality Parameters for Coconut Products and Sub-products. 32
LIST OF FIGURES
Figure 1. The Global Commodity Chain. 4
Figure 2. The Life Cycle Model. 5
Figure 3. The Quality Chain Model. 6
Figure 4. The Production Chain of Coconut.12
Figure 5. The Processing Chain of Coconut.15
Figure 6. Map of El Salvador.16
Figure 7. The Production Chain of Coconut for JOBAL.23
Figure 8. The Processing Chain of Coconut for JOBAL.24
Figure 9. Pattern of Interrelationships on the Output Side.27
Figure 10. Pattern of Interrelationships on the Input Side.31
CHAPTER 1 BACKGROUND
1.1 Introduction
For many of the world’s population, the growing integration of the global economy has provided an opportunity for substantial economic and income growth. The fact that globalization in this new era has also come to include the commercialization and trade of agricultural commodities has opened up significant opportunities for agricultural regions in developing countries. Agriculture continues to be the main source of employment, livelihood, and income for more than half of the population in developing countries and for more than three-quarters of the population living in rural areas. For such regions, the integration of production processes on a global scale contains the promise of potentially increasing their rate and scope of agricultural production. For farmers, it contains the promise of upgrading their production activities and, for traders, it contains the promise of increasing the volume and frequency of sales of agricultural commodities on the international market.
Development economists understand that without sustained economic growth there is little hope of addressing the poverty and inequality that is so pervasive in rural areas. They therefore view the growing integration of the global economy as an opportunity for entering a new era of agricultural and economic growth, reflected not only in the possibility of reaping higher incomes but also in the improved availability of higher quality and increasingly differentiated agricultural commodities.
At the same time, however, globalization has had its dark side. There has been an increasing tendency towards growing inequality within and between countries and a growing incidence of poverty. These positive and negative attributes of globalization have been experienced at a number of different levels –the individual, the household, the firm, the sector and the nation. The pattern emerging in recent decades of globalization is thus simultaneously heterogeneous and complex.
If those who had lost from globalization had been confined to the non-participants, the policy implications would be clear –take every step possible to participate in global production and trade. However, the challenge is much more daunting than this, since the losers include many of those who have already actively participated in the process of global integration. Hence, there is a need to manage the mode of insertion of agricultural producers into the global economy to ensure that rural incomes and living standards are not or further polarized. Agricultural producers need to become more competitive in a sustainable way in order to reap the full benefits of their participation in global markets.
A central question thus arises: Which technological options exist for making agro-food supply systems more sustainable from a socio-economic, health and environmental perspective? This question has important methodological and policy implications. The key policy issue is not whether to participate in global markets, but how to do so in a way which provides for sustainable income growth. This is a particular problem for poor producers and poor countries which have experienced more of the downside than the upside of globalization over the past two decades. The question has important methodological implications too –what is the best way to generate the information required to document these developments in production and appropriation, and how can we identify policy instruments which might arrest, and perhaps partially even reverse these developments?
Extended global commodity chain analysis provides a methodology for addressing this question. Of course it does not tell the whole story, which to be complete would also have to address macroeconomic issues (particularly capital flows and their volatility), political issues (particularly the factors determining the rate and productivity of investment) and the determinants of social capital. But commodity chain analysis, which focuses on the dynamics of inter-linkages within the productive sector, especially the way in which firms and countries are globally integrated, takes us a great deal further than traditional modes of economic and social analysis.
There are three reasons why global extended commodity chain analysis is important in this era of rapid globalization: (a) with the growing division of labor and the global dispersion in the production of agricultural commodities, system competitiveness becomes increasingly important, (b) efficiency in production is a necessary condition for successfully penetrating global markets, and (c) entry into global markets which allows for sustained income growth requires an understanding of dynamic factors within the whole commodity chain.
El Salvador has recently implemented institutional reform policy which aims at increasing the capacity of the agricultural sector for it to make a stronger contribution to economic development. This is to be achieved through increased agricultural employment, increased production and improvement of the ecological environment (MAG, 2002). To help policy makers become aware of their options and limitations in increasing the capacity of the coconut sector, this study intends to provide extensiveinformation on the structure, conduct and performance of the coconut commodity chain in El Salvador. This type of information would not only offer insight into those stages of production that are sustainable or not, but would also provide information on those production activities which would need to become upgraded in order to increase the volume and frequency of sales on the international market.
1.2 Research Objectives
The main objective of this research is to improve the returns accruing to coconut growing farmers in El Salvador by providing the information needed to make them more competitive in a sustainable way. Specifically, this study aims at identifying technological options for improving the sustainability of the coconut supply chain from a socio-economic, health and environmental perspective. A multitude of methodologies will be adopted to capture the full scope of information needed to assess and improve the sustainability of the coconut chain in El Salvador. The objectives of this study are summarized as:
1) Identifying key actors involved in coconut production and trade in El Salvador.
2) Identifying key stages in the production and processing cycle of coconut.
3) Identifying options for improving the quality of coconut products and sub-products.
4) Addressing potential health risks in the production and processing of coconut.
5) Addressing environmental hazards in the production and processing of coconut.
1.3 Theoretical Framework
At the simplest level, commodity chain analysis plots the flow of goods and services up and down the chain, and between different chains. This is in itself a valuable task. Considered in this way, the commodity chain is a descriptive construct, at most providing a heuristic framework for the generation of data.For commodity chain analysis to become an effective tool for identifying policy levers to ameliorate trends towards inequality, there is need for a more analytical structure. There are three important components of commodity chains which need to be recognized and which transform it from a heuristic device into an analytical tool:
• Commodity chains are repositories for rent, and these rents are dynamic.
• Effectively functioning commodity chains may involve some degree of ‘governance’.
• There are different types of commodity chains.
1.3.1Barriers to Entry and Rent
The commodity chain is an important construct for understanding the distribution of returns arising from production, trade, processing, wholesaling, and retailing. The primary returns accrue to those parties who are able to protect themselves from competition. This ability to insulate activities can be encapsulated by the concept of rent.
There are a variety of forms of rent. The focus of much of the literature, entrepreneurial energies and government policies is on what is termed economic rents. The classical economists (such as Ricardo) argued that economic rent accrues on the basis of unequal ownership/access or control over an existing scarce resource (e.g. land). However, as Schumpeter showed, scarcity can be constructed through purposive action and hence an entrepreneurial surplus can accrue to those who create this scarcity. For Schumpeter, this is essentially what happens when entrepreneurs innovate, creating ‘new combinations’ or conditions, which provide greater returns from the price of a product than are required to meet the cost of the innovation. These returns to innovation are a form of super-profit and act as an inducement to replication by other entrepreneurs also seeking to acquire part of this profit.
But not all rents are producer rents. Some arise from the command over scarce natural resources (such as access to water or fertile land), and others are provided by parties external to the chain. For example, efficient government policy makes it easier for farmers in some countries to construct economic rents through providing better access to human skills, and better infrastructure and more efficient financial resources than in competitor countries. Governments may also protect producers from competition, not just through commodity-specific policies such as import controls, but also through factor-specific policies such as controls on immigration.
1.3.2 Governance
A second consideration which helps transform the commodity chain from a heuristic to an analytical concept is that the various activities in the chain are subject to governance. Governance ensures that interactions between the various actors along a commodity chain exhibit some reflection of organization rather than being simply random. Commodity chains are governed when parameters requiring product, process, and logistic qualification are set which have consequences up or down the commodity chain encompassing bundles of activities, actors, roles, and functions.
This is not necessarily the same thing as the coordination of activities by various actors within a commodity chain. Coordination usually involves managing the parameters as they are exhibited in bundles of activities undertaken by various actors performing specific roles in the chain. It also requires monitoring of outcomes, linking discrete activities between different actors, establishing and managing the relationships between the various actors comprising the links, and organizing the logistics within the entire chain. It is this role of coordination, and the complementary role of identifying dynamic rent opportunities and apportioning roles to key players which reflects an important part of the act of governance.
Commodity chains are coordinated at different places in the linkages in order to ensure that the benefits or consequences of participation are managed in particular ways. Power asymmetry is thus central to commodity chain governance. That is, there are key actors in the chain who take responsibility for the division of labor, and for the capacities of particular participants to upgrade their activities. Power can be exercised in various forms. Within a commodity chain this can be understood in two separate forms: (a) ensuring consequences along the chain; and (b) actively managing or coordinating the operations of the links within the chain to ensure that these consequences are met.
1.3.3 Different Types of Commodity Chains
Building on this concept of governance, it is important to distinguish between two types of commodity chains. The first type is one where the critical governing role is played by a buyer in the apex of the chain, termed here as ‘buyer-driven chains’. The second type is one where key producers in the chain, generally commanding vital technologies, play the role of coordinating the various links and is termed here as ‘producer-driven chains’. A third type of chain can also be distinguished in which there is very little governance at all, or at best very thin forms of governance.
1.4Methodological Framework
The world of production and exchange is complex and heterogeneous. Not only do commodity chains differ, but so, too, do national and local contexts. There is thus no mechanistic way of applying commodity chain methodology. Each chain has particular characteristics, whose distinctiveness and wider relevance can only be effectively captured and analyzed through an understanding of the broader issues which are involved.
This research therefore adopts a multitude of methodologies. A global commodity chain analysis methodology will be adopted to analyze the structure and dynamics of the inter-linkages within the productive sector. A quality chain model will be adopted to identify technological options to improve the quality of coconut products and sub-products based on an analysis of the production and processing cycles. Potential health risks and environmental hazards involved in the production and processing of coconut will be addressed using a life cycle analysis methodology.
1.4.1 Global Commodity Chain Analysis
A global commodity chain describes the full range of activities which are required to bring a product or service from conception, through the different phases of production (involving a combination of physical transformation and the input of various producer services), delivery to final consumers, and final disposal after use. Considered in its general form, it takes the shape as depicted in Figure 1. As can be seen from this, production per se is only one of the numbers of commodity chain links. Moreover, there are ranges of activities within each link of the chain.
By focusing on all the links in the chain (not just on production) and on all activities in each link (for example, the physical transformation of materials within the production link), commodity chain analysis helps to identify which activities are subject to increasing returns, and which are subject to declining returns. As a result of being able to make these distinctions regarding the nature of returns throughout the chain, policy makers are assisted in formulating appropriate policies and making necessary choices. These may be to protect particularly threatened links (e.g. poor informal operators) and/or facilitate upgrading of other links in order to generate greater returns.
Figure 1. The Global Commodity Chain.
The structure of global commodity chains is traced by mapping out the flowchart of the chain. It includes the full range of activities, going from raw material exploitation, through different processing, industrial transformation and trading stages, to the sale, consumption, and disposal of the end product by final users (Pelupessy, 2003). Mapping the full range of activities in the chain provides the capacity to decompose total value chain earnings into the rewards which are achieved by different parties in the chain.
Once the integral chain and its segments are mapped out, the different actors and their main characteristics and interrelations are identified. The pattern of interrelations is important in understanding the dynamics of income distribution over time. These patterns of interrelations are not static, but dynamically change in time, in function of developments of both production systems and surrounding conditions (Diaz, 2003 cited in Pelupessy, 2003).
The chain dynamics are specified by four dimensions: (a) the value-creating input-output activities; (b) the locational pattern; (c) the institutional framework; and (d) the governance structure. The value-creating activities identifies the full range of various activities from which income is generated within the commodity chain while the locational pattern identifies the geographical dispersion of these activities and earnings and of health and environmental effects. The institutional framework identifies the normative levers which can be used to alter the distributional patterns of activities and earnings. The governance structure, finally, identifies the interrelations among different actors which determine the distributional outcomes of participation in the chain and the capacity which individual producers have to upgrade their operations and thus to launch themselves onto a path of sustainable income growth.
1.4.2 Life Cycle Analysis
Life cycle analysis is a method used to investigate and assess the environmental impact of a product and process throughout its entire life cycle. It maps the resource flows into and out of the product system along the full range of activities within the commodity chain. The energy and material flows entering and leaving the commodity chain are accounted for as resources entering the product system and emissions leaving the product system.