"Economic challenges of the European F&V and potato processing industry"
Xavier Gellynck & David Keirsebilck (2006). UGent: Working Paper 06.03
Introduction
The European fruit, vegetable (F&V) and potato processing industry has undergone significant changes during the last two decades in response to changing consumer demand for new and different products and to the evolution of a more open trading environment. Under the influence of globalization, the processing industry has changed from serving a protected, domestic-oriented market to one that is more open and competitive.
In this report, an overview is given of the current situation in the fruit, vegetable and potato processing industry. Current trends and developments are determined and evolve the identification of challenges for the coming decade.
Methodology
The conceptual framework considers the overview of the determinative future perspectives in the F&V processing industry. A distinction is made between two large groups, namely market conditions on the one hand and production conditions on the other hand. It is the objective to follow this conceptual framework in order to determine the challenges of this part of the agribusiness (Fig. 1; De Groot e.a., 1994)
Market Conditions
The market conditions are both depending on the developments in an international context and the market approach. The international context is strongly influenced by policy measures and trade regulations, the WTO and the CAP. The market approach discusses the evolutions of consumer preferences and trends. Further on, some global socio-demographic evolution are key driver for changing consumer preferences.
International Framework
International developments
In general, the exchange rate and the gas oil prices have a major impact on the profit margins of food processing companies. External factors such as the concealed threat of terrorism, Iraq, hurricanes and governmental policies are keeping the cost of gas oil high. Since 2002, the U.S. dollar has weakened by as much as 35% against the European euro. China has fixed its exchange rate relative to the U.S. dollar. These factors are weakening significantly the position of the European F&V processing industry. Rising energy costs are related on the production and transportation costs. In particular, on the storage and preservation of frozen commodities, the high steel and aluminium prices are augmenting the costs of canned products. The strong position of the retail, the food-service and inter-company competition inhibits a full-cost incorporation towards the consumer.
There are several international developments having a major influence on the position of the European fruit & vegetable processing industry. The trade liberalization and the Common Agricultural Policy in the EU measures in other regions are examples of institutional factors that play a role in the patterns of global trade in fruits and vegetables.
WTO and world trade
General
Despite the improvement in the overall trade environment for fruits and vegetables, there are still high tariffs and other non-tariff barriers to trade. One of the most common non-tariff barriers is comprised of the various antidumping rules that countries can and do invoke to avoid the influx on imports. Anti-dumping practices affect the patterns of trade in fruits and vegetables and remain a threat to the trade of some commodities in some countries.
The current shift towards liberalisation, the further reduction of trade barriers and the subsidy reduction evolves changes in trade patterns for fresh F&V. Horticultural exports of Central and South America, and the Middle-East and North Africa can be expected to increase, as can be the net imports of the European Union, the U.S. and Japan. China is emerging as an increasingly important horticultural exporter and this role could be boosted should trade be liberalised, especially with increased exports to Japan, Korea and the rest of Asia (Rae, 2004). A similar role can be contributed to India.
Globalisation
Globalization of the F&V trade has made fresh produce accessible to consumers around the world, overcoming seasonality and smoothing price fluctuations. High income-growth rates in developing countries significantly higher rates of F&V consumption and trade in the future. In the meantime, developed countries will dominate global consumption and trade of fruits and vegetables, not only because of their high income levels but also because of consumers’ increasing concerns about healthy eating, which tend to increase F&V intake in their diets. The United States is well placed to take advantage of the potential for greater horticultural trade, both as an importer and as an exporter, because of its income level, access to advanced technology and transportation, and trade agreements that allow for the freer flow of products around the globe.
The development of some major production countries such as China, India, Turkey and Thailand can change global trade patterns in the coming decade.
§ Traditionally, processed products dominated China’s overall exports of fruits and vegetables, accounting for nearly two-thirds of expert value during 1998-2000. Japan is the leading market for Chinese exports of processed products. In the 1990s, China’s share of Japan’s import market for processed fruits and vegetables trended steadily higher. China’s share jumped from 24% in 1990 to more than 50% in the beginning of the 21st century (Dyck e.a., 2002; Huang, 2004b; Shields e.a., 2004; Yuman e.a., 2004).
§ An expert opinion survey has inferred the following trends in the future for fruits and vegetables sector in India: F&V would continue to be harvested manually in the future. While small land holdings and non-availability of good quality planting material have been the major issues of concern, it is expected that quality of planting material would improve in the long run due to selection, hybridisation, breeding and tissue culture.
For poor farm management practices, there exists strong need for extension education and training for the growers. Cooperative and contract farming may solve the problems for small land holdings towards improved yield and quality in the long run (TIFAC, 2000).
Application of fungicides/pesticides and chemical preservatives would be phased out and would be replaced by more environment friendly technologies in the long run. While pre-cooling (cold chain) and surface coating are expected to dominate in the short run, new packaging and irradiation technologies are expected to emerge in the long run for preservation and extension of shelf life. Change in consumer taste, food habits & life style, convenience, nutritional value and purchasing power are the likely reasons for preference of processed products. While the level of processing would hover around 5-10% in the next 10 years, 15-20% of fruits and vegetables may be processed by 2010. While the small scale processing units would dominate in the short term, an advent of large/medium scale units is likely in the long term (TIFAC, 2000).
The quality gap between Chinese, Indian and foreign products in international markets may well be closing. This means producers with higher costs will need to compete on the basis of reliability, consistency of product service, and other non-price factors (Huang, 2004)
However, there are some comments to be made.
§ First, South-east Asia and China offer only a few varieties of fruits and vegetables in large volume for the export market. High quality products are available, but volume is limited and generally predestined for a particular market.
§ Secondly, the vegetable and fruit industry dies not use grade standards (e.g. for uniform product size an appearance), which are essential for international trade, although a number of private firms successfully export fresh and processed products based on customer specifications.
§ Third, China does not widespread use of basic marketing practices, such as modern packing and packaging techniques. The ample supply of labour (and associated low cost) slows adoption of capital improvements that would improve produce quality (Huang, 2004)
Common Agricultural Policy (CAP)
EU preferential trading agreements are an integral part of the management of fruit, vegetable and potato imports by the CAP. For F&V produced in significant quantities within the EU, the CAP maintains relatively high prices by controlling the quantity and pricing of imports. For many products, the CAP establishes minimum import price requirements or restricts imports through quotas associated with the various preferential trading arrangements. Nevertheless the EU remains the world’s largest importer of fruits and vegetables because of limited production potential for many products and strong demand from EU consumers due to high incomes, an aging population that prefers a healthy diet, and a historical preference for high-quality fruits and vegetables (Hasha, 2004)
With fewer constraints and lower transaction costs, firms can design strategies for optimization of sourcing on a global level, not just on a national level. Being a player in an international arena requires more resources than being a player in a national market, but may be necessary to stay competitive in domestic markets. Some types of firms will be better able than others to adapt to the challenges (Huang, 2004)
Socio-demographic developments
Socio-demographic changes are the general starting point of the changing consumer preferences and behavioural aspects. Changing environment and lifestyles are resulting in a series of influencing factors affecting consumer needs and market trends .Coming decades the current socio-demographic tendencies are persistent for population growth, , urbanisation, migration life expectancy, the aging population, household composition, career-women, …
World population growth
Fig 2 illustrates three scenarios for population change, depending on levels of fertility. World population is projected to increase to 7.8 billion by 2025, and to reach 8.9 billion by 2050, according to the medium scenario where fertility stabilizes at 2.1 children per women. This projection does not correspond with the doubling time of 51 years associated with the annual growth rate in 2000. The projection assumes that the growth rate will drop slightly by 2020 and continue declining as the century progresses. If the growth rate does fall and the world population reaches 11 billion by 2100, the population will have doubled in about 100 years. Because most of the world's population growth is likely to continue to be in less developed countries, Asia will continue to hold the majority of the world's people. Africa and Latin America will gain larger shares than they have at present. The population of these regions may increase by 100 percent by 2100, according to moderate projections. In 2100, nearly 90 percent of world population could live in countries currently considered less developed, compared with about 80 percent today (UN, 1998).
Urbanisation
The world has experienced unprecedented urban growth in recent decades. In 2000, about 47 percent of the world's population lived in urban areas, about 2.8 billion. There are 411 cities over 1 million. More developed nations are about 76 percent urban, while 40 percent of residents of less developed countries live in urban areas. However, urbanization is occurring rapidly in many less developed countries. It is expected that 60 percent of the world population will be urban by 2030, and that most urban growth will occur in less developed countries.
Aging of people
This 21st century phenomenon, shared by many nations, can be attributed to advances in science, technology and medicine leading to reductions in infant and maternal mortality, infectious and parasitic diseases, occupation safety measures, and improvements in nutrition and education. Rapidly expanding numbers of very old people represent a social phenomenon without historical precedent. Today, the number of persons aged 60 years or older is estimated to be 605 million. That number is projected to grow to almost 2 billion by 2050, when the population of older persons will be larger than the population of children (0-14 years) for the first time in human history.
Changes in household composition
According to an Irish survey in 2003, following tendencies are noticeable between 1996 and 2002:
§ increase in number of childless couples with 38,7%
§ increase of lone parents with 24,5%
§ the amount of one person augmented with 14,8%
In addition, the amount of couples with children grew less with 11,1%. Family planning, less adherence to the catholic dogma, increase in female participation in labour force and women that are postponing child bearing were the factors leading to an increase in childless couples.
The factors leading to an increase in one person households were the increase in number of singles, the increase in number of separated and divorced people and the significantly growth of the amount of elderly of which 26% life alone. In total, elderly constituted in 2002, 41% op the Irish 1-person households.
Market Conditions
Consumption
Potato
Consumption of potatoes has declined between 1975 and 2003. Consumption of fresh potatoes has halved between 1975 and 2003. Consumption of processed potatoes, of which the main components are chips and crisps, has doubled over the same period of time (UK survey
Fruits
Based on data of the National Food Survey (UK, 2003), fresh fruit consumption has risen by over 50 % between since 1975. Among the same period, processed fruit consumption has risen by over 80%, almost exclusively driven by an increase in the consumption of fruit juices which more that off-set decreases in canned, dried and frozen fruit products.
Vegetables
The UK-survey indicated that the fresh vegetable consumption has changed little since 1975 (see figure 5a).. However, there has been a shift within the fresh green vegetable category
Average consumption of green fresh vegetables has dropped by 32 % . Over the same period of time, consumption of other fresh vegetables has increased by 25%. Consumption of processed vegetables his risen, however in recent years ht trend seems to have been reversed. In 1996, the consumption of processed vegetables was highest (727g per person per week); it has decreased steadily since then. Consumption of all vegetables including potatoes has increased by 7,7% since 1975