In a context of financial deregulation and high price volatility for agricultural commodities, promoting competitive and sustainable agriculture has become a real challenge namely for French and European agri-food industries, which are under a huge pressure from emerging countries on the global market. How to build a ‘common future’ that will help make the French and European agri-food industry more competitive? This is a critical question at a time when there are strong dissensions in the agri-food sector, mainly in France.
We recommend reading the survey published by Frédéric Courleux and Marie-Sophie Dedieu from the Centre for Economic Study and Forecasting (CEP). The text below features excerpts1
selected from this survey. Frédéric Courleux and Marie-Sophie Dedieu propose a didactic approach, which provides an interesting insight on economic competitiveness, and further reviews the multiple determining factors underpinning the competitiveness of the agri-food industry, a major objective of the 2014-2020 CAP.
The factors determining competitiveness in the agri-food industry reveal a specific sector that cannot be apprehended through a linear approach, and whose stability and efficiency are based on the fine tuning of strategies aimed at boosting ‘cost competitiveness’ and ‘non-price competitiveness’ (innovations, differentiation, implementing economic indicators…).
In the end, it is the ‘shared awareness of mutual dependence and non-cooperative strategies’ paired with the implementation of regulatory mechanisms that will protect the agri-food sector: farmers, industrial players and consumers, against the high volatility of prices on the market for agricultural commodities.
momagri Editorial Board
In a context of increased competition and price volatility on the market for agricultural commodities, the competitiveness of the French agri-food industry is a recurring issue.
Apprehending this notion is nevertheless a sensitive question when taking into account its relative scope, as well as the contradictions that are likely to arise from gaining market shares in terms of social and environmental consequences. Whereas efforts are often aimed at promoting ‘cost competitiveness’, focusing on strategies that are based on ‘non-price competitiveness’ remains essential. Beyond these strategies, competitiveness is influenced by a wide range of factors. And in this sense, competitiveness appears to be the end result of an economic and social construction based on political and organisational choices, rather than merely the expression of intrinsic factors and qualities.
Building a competitive economy is one of the main objectives of public policies. On a European scale, this objective was reaffirmed by the ‘Europe 2020’ strategy. For the agricultural and agri-food sectors, ‘competitiveness’ is the key objective underpinning the Common Agricultural Policy for 2013-2020. In France, increased competition with other countries within the EU and countries outside the EU, namely commercial exchanges with countries in the Mercosur common market, questions the competitiveness of French agriculture and agri-food industry.
1 - The notion of competitiveness
Competitiveness measures the capacity to keep and gain market shares in domestic and international markets in a competitive environment. Nevertheless, one should bear in mind that the trade surplus of one country spells the trade deficit of another. The quest for competitiveness is therefore intrinsic to all private businesses, and on a larger scale, this quest involves entire sectors of activity and countries.
The term ‘competitiveness’ in its common acceptance since the early 60s, stems from the notion of ‘competitive market’, namely a market that functions in a smooth and faultless way and which guarantees the optimal allocation of resources in a neoclassic economy.
A relative notion
An economic agent may only be qualified as competitive in comparison with other competitors offering the same type of goods or services. However, most of the time, this term is used to qualify an economic player based on his production costs compared to average prices. If average prices allow him to cover his production costs, including minimum remuneration for fixed production factors (land, labour, working capital), the player in question is deemed to be competitive.
This second type of comparison is nevertheless tricky as average prices rarely reflect 'equilibrium prices'. The very low prices for main agricultural commodities prior to 2006, and their excessive increase during the 2007-2008 global food crisis, questions market efficiency, and more precisely its ability to provide a reliable price signal. In this sense, just because a price is low does not necessarily mean that a competitor is more competitive: it may be that this competitor is in a situation where he is unable to cover his costs simply based on the remuneration of production factors.
Competitiveness and temporality
The notion of competitiveness mainly refers to short term performance whereas sustainability, in its economic, social and environmental dimensions, essentially refers to long term performance. Deliberate and non deliberate strategies based on cutting down costs may help improve competitiveness in the short term, but in the long term may turn out to be highly destructive when these strategies affect the ability of companies and industries to invest and modernize their infrastructures. Recurrent under investment in the British dairy sector is a blatant example of this.
Independently of this temporal aspect, the notion of competitiveness extended to the field of business and applied to economic policies has been criticized by many economists.
Ignoring the fact that consumption drives the economy almost to the same extent as innovation, a number of strategies aimed at increasing market shares through reduced wages, competitive deflation and devaluation encourage non cooperative policies, which may be efficient in the short term, but eventually lead to the destruction of wealth and jobs on an aggregate level.
2 - The factors determining competitiveness: ‘Cost competitiveness’
The terms ‘cost competitiveness’ and ‘price competitiveness’ are used interchangeably given the fact that the capacity to offer or sustain lower prices depends on the structure of production costs. Three types of factors determine 'cost competitiveness’: pedoclimatic factors and the geographical location of activities, factors dependent on technical and economic efficiency, factors in relation with the global economic context.
Improving ‘cost competitiveness’ also means finding the best possible compromise between specialization, a source of technical efficiency, and diversification which is likely to provide a synergy between different types of production (economies of scope), and minimize risk exposure by better balancing these risks.
The global political and regulatory context also influences ‘cost competitiveness’ for agriculture and agri-food industries on a national level, as international competition evolves within a distinct economic context, one that depends on global economic and monetary policies and regulatory frameworks specific to agriculture and agri-food industries. Therefore, economic agents seeking to optimize their activity based on these determining factors cannot concurrently evade them.
3 - ‘Non price competitiveness’, another major determining factor
Besides the factors determining ‘cost competitiveness’, other factors provide a competitive advantage to farmers and agri-food businesses based on product differentiation, a strategy that allows farmers and businesses to actively market their products in order to meet the specific requirements of their customers. Innovation and differentiation strategies can be based on an individual or collective approach, and rely on creating and marketing brand names, geographical indications, quality standards and certification schemes that guarantee production processes.
These examples oppose a linear assessment of competitiveness within a given sector as the sum of the competitiveness of each one of the units included in the global value chain. The interactions between these units are highly interdependent, and as such can turn out to be a source of synergy and efficiency. However, this interdependency may lead to tension and inertia if there is a lack of awareness of this mutual dependence and a lack of cooperative strategies.
The economic organization of a sector is therefore one of the essential factors determining its competitiveness.
In a context of price volatility, the problematics linked to price transmission within the agri-food industry, underline the importance of taking into consideration the interactions between the different units in the agri-food chain when assessing competitiveness. Unbalanced power relations during negotiations, and the incapacity to implement an organization likely to achieve a better balance of power can lead to a distribution of added-value that disadvantages those with a lack of power to negotiate better terms.
In the long term, this leads to what transaction cost economics refer to as the ‘hold up problem’, which occurs when one of the parties attempts to appropriate through opportunistic behaviour the quasi-rents generated from the relationship, and which may prejudice both parties in the long term. As a result of this ‘hold up’, the weaker party will face a slow decline as a result of poor investment which will affect his ‘cost competitiveness’ and bring about his fall as well as that of the stronger party, as both of them are forced to face competitors, who unlike them, have managed to build a common future.