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SUFISA Report Summary

Project ID: 635577
Funded under: H2020-EU.3.2.

Periodic Reporting for period 1 - SUFISA (Sustainable finance for sustainable agriculture and fisheries)

Reporting period: 2015-05-01 to 2016-10-31

Summary of the context and overall objectives of the project

A good functioning of the European food system is key to deliver food and nutrition security for all Europeans in a sustainable way. Primary production—that is agriculture, fisheries and aquaculture—forms the foundation of the food system. A good functioning food system thus requires farmers and fishermen to earn a sufficient income from their activities. However, farmers and fishermen face the double challenge of increasing both their competitiveness and their environmental performance. In order to deliver on these two challenges, farmers and fishermen depend on public and private actors, such as government regulators (including the EU’s agricultural and fisheries policies), the financial sector, input suppliers, the food industry, retailers, consumers, etc. Increasing attention is devoted to achieving sustainability goals, but existing policies and practices enacted by these actors may hinder farmers and fishermen in their strategies to achieve sustainable outcomes as a result of market imperfections and incoherent policy requirements. New ways of doing business in the agri-food system are emerging as an answer to these changing contexts and incentives. Yet, these phenomena are still limited and their occurrence varies across sectors and regions. In Europe, some seem reluctant or more constrained for such a shift, while others are already pushed by tighter regulation and/or increasing demand for sustainable food. The speed at which it will happen, depends on the conditions prevailing in each sector.

Farmers face a double burden: on the one hand, society requires them to use more environmentally friendly production practices, but on the other hand, they need to stay competitive. Hence, additional costs resulting from applying these practices are difficult to recover. Competitive pressures arise due to open markets in which farmers face increasing competition, but also due to unfair trading practices enacted by buyers in the form of unduly late payments, unfair shifting of costs or risks, unilateral and/or retroactive contract changes and unfair contract termination.

While there are many strategies that farmers can take to address these issues of competitiveness, risk and sustainability, inevitably addressing environmental issues raises costs. However, increasing costs not only relate to increased production costs, but also to increased marketing costs. Marketing costs are higher due to higher transaction costs (e.g. inspection costs), higher handling costs (e.g. separate logistics) and higher risk (e.g. immature market leading to irregular sales). While short supply chains have been organized to overcome these costs by directly involving consumers, other mechanisms are needed in mainstream supply chains.

SUFISA thus aims to identify practices and policies that support the sustainability of primary producers in a context of complex policy requirements, market imperfections and globalization.
The five specific objectives of SUFISA are:
1. To construct a conceptual framework that links market imperfections and policy requirements to primary producers’ conditions, strategies and performance;
2. To investigate the nature of market imperfections, policy requirements and their implications for specific commodity sectors and regions;
3. To analyse the impact of market imperfections and policy requirements on the efficiency and performance of primary producers;
4. To identify practices and policies in the agricultural, fish and food sectors that support the sustainability of primary producers and develop future scenarios aimed at countering the identified market imperfections;
5. To carry out work in a transdisciplinary way using a multi-actor approach, that is, to actively engage a broad spectrum of relevant stakeholders from the beginning of the project in order to optimise both the relevance of the work carried out and its dissemination and uptake by stakeholders.

Work performed from the beginning of the project to the end of the period covered by the report and main results achieved so far

The main results so far concern the development of the conceptual framework and the case study analyses. A first draft of the conceptual framework has been presented at a SUFISA workshop on the IFSA 2016 conference. Based on the framework and the analyses on the 22 cases, we can summarize our first insights as follows.

Increased vertical coordination between farmers and buyers may reduce transaction costs and risks, but handling costs remain high as these are strongly related to scale economies. Such scale economies can be realized by increased horizontal cooperation between farmers by pooling produce. Horizontal coordination may also reduce transaction costs in relation to buyers, but may increase transaction costs between farmers. However, the extent to which costs and risks are shared in both vertical and horizontal arrangements depends to a great extent on the power dynamics within these arrangements.

Buyers may exert market power upon farmers pushing costs and risks away by threatening to change or terminate contracts. This greatly depends on the quality of the contracts between farmers and buyers. Fair contracts should therefore ensure that such hold-ups cannot occur.

But power dynamics may also play within horizontal arrangements, such as cooperatives and producer organizations. Farmers differ in size and cost structure and this may undermine cost sharing based on solidarity, as for instance large farmers may threaten to leave the cooperative. However, a too strong cooperative mindset may hinder innovation, further decreasing the incentive to cooperate. Hence, horizontal cooperation should be based on flexible, but fair agreements among farmers.

Ideally, increased horizontal and vertical coordination reinforce each other, as both coordination mechanisms can reduce collective costs and risks. What will be critical is to take into account the large diversity of the EU agricultural and food system, since different farmers value different attributes in these arrangements, depending on many factors, including the size of their farm and their risk preferences. A next question is how to stimulate such arrangements and also to ensure that different types of arrangement can co-exist, which requires a careful analysis of the political, economic, legal and socio-cultural factors that foster or hinder the emergence of such coordination schemes.

Progress beyond the state of the art and expected potential impact (including the socio-economic impact and the wider societal implications of the project so far)

SUFISA aims to contribute to the development of new institutional arrangements in the agro-food sector that address long-term sustainability. More specifically, SUFISA will advance the state of the art by better understanding the factors influencing the development of such arrangements and by getting insights into the attributes of such arrangements as preferred by farmers and fishermen. SUFISA will also investigate the viability and long-run implications of such arrangements. This will enable industry stakeholders as well as policy makers across the EU to improve existing and design new institutional arrangements, ultimately resulting in the enhanced competitiveness and environmental performance of EU agriculture, aquaculture and fisheries and thus food and nutrition security within the EU.

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