Farmers’ selection model in a club value chain: the case of the Agro-Pontino kiwifruit industry

From Firenze University Press Journal: Italian Review of Agricultural Economics (REA)

Mara Lai, CREA — Research Centre for Agricultural Policies and Bioeconomy

Luca Cacchiarelli, Tuscia University

Carlo Russo, University of Cassino and Lazio Meridionale

Alessandro Sorrentino, Tuscia University

Gaetana Petriccione, CREA — Research Centre for Agricultural Policies and Bioeconomy

Protected varieties are those for which breed-ers holds intellectual property rights (IPR), under the TRIPS/WTO agreements or the UPOV 1991 Conven-tion or the EU Community Plant Variety Right (CPVR). Supply chains organised around protected horticultural varieties are assuming a relevant role in the fruit sector (Noleppa, 2016; Sansavini, Guerra, 2015). Known as “club supply chains” (from club varieties), their devel-opment benefited from the regulation on Plant Vari-ety Protection (PVP) approved in 1991, as a result of the reform of the Union for the Protection of New Plant Varieties (UPOV), considered a “sui generis” protection system particularly suitable for horticultural plants.The 1991 UPOV regulation reform extended protec-tion to harvested materials and gave impulse to breeding programmes in the fruit sector and to the economic exploitation of protected varieties, expressed by the initiating of several club supply chains. The effects of UPOV regulation, however, are still con-sidered controversial because of the implications that its provisions might have on the organisation of agriculture supply chains, in terms of distribution of power along the chain and of farmers’ position and welfare (Tripp et al., 2007). Breeders may claim their property rights on the harvest; when this happens, farmers might be sub-jected to production standards and delivery obligation. This implies that the breeders can extend their control on the marketing phase being at the same time input monopolist and harvest monopsonist for the farmers in the club. The reform of the legislation gives breeders the ability to influence both the upstream and downstream segments of the supply chain, by setting the quantity to be produced and imposing marketing control of the har-vest (Di Fonzo et al., 2019).Club supply chains represent an example of the effects that PVPs can have on the organisation of supply chains. In a typical club supply chain, the rights holder acts as lead firm exerting the «power to set the condi-tions for the inclusion of smallholders and the gains that accrue to them» (Lee et al., 2012). PVPs give breed-ers the possibility to influence management decisions of those farmers who want to grow protected varieties, because the right to use the variety can be conditional on contract agreements. These limits might go from pay-ing royalties to joining a club supply chain. The latter might imply respecting production quotas decided by the breeder and adopting specific agricultural practices; thus, making relation-specific investments (Noleppa, 2016; Russo, 2020; Tripp et al., 2007). Whether the right holders are breeders or third parties, the key element is that they represent the lead firm of the supply chain and, as such, control its set-up and organisation.

The most relevant examples of club supply chains can be observed in the kiwifruit and apple industries, but the trend in the use of protected varieties is growing in other industries (grapes, nectarines, apricots, pears), albeit with a lower level of complexity in their organisation (Legun, 2015; Sansavini, Guerra, 2015). Usually, in these other industries the exploitation of protected varie-ties is limited to the payment of royalties, per plant or per quantity produced, or as one-off payment. As for the club supply chains, the kiwifruit industry is considered a key example of development of club varieties (Di Fonzo et al., 2019; Sansavini, Guerra, 2015). The growing role played by protected and club varieties in the fruit sector raised interest in how these food chains are organised and structured. In relation to their organisation and the role played by breeders, the concept of excludability from the use of a certain good or service, as elaborated by the Theory of Clubs (Buchanan, 1965), becomes relevant. A club has been defined as «a voluntary group deriving mutual benefit from sharing one or more of the following: production costs, members’ characteristics, or a good characterized by excludable benefits» (Sandler, Tschirhart 1980). The theory applies to those arrangements where excluding potential members from entering a club is possible. The accessibility of a club-good to non-club members would imply its use without paying the costs associated to membership. Hence, the flexibility of property arrange-ments represents an effective tool to exclude non-mem-bers from the use of the good (Buchanan, 1965). In the case of the kiwifruit clubs, the theory applies because the breeder and farmers achieve mutual benefits (large production volumes and higher prices, respectively) by voluntarily sharing the use of the protected variety and knowledge. Yet, unique characteristics emerge. Specifi-cally, membership is awarded by the breeder, who also decides production volumes and practices, including quality standards of the harvest. The breeder’s power to regulate access changes the nature of the innovation diffusion process from an innovation adoption model, where the innovation is adopted by any farmer who is willing to pay the price, to a supplier selection model where the innovation is accessible only to the farmers that the breeder decides to accept in the club. Breeders, in order to maximize their profit, will privilege more efficient farmers, capable of implementing the quality standards at a minimum cost. This might result in the exclusion of less efficient farmers from access to these new varieties, technical innovation and, potentially, higher profits.

Adoption and diffusion of innovation in agriculture have been extensively studied in economics and, more recently, in sociology, psychology and marketing; thus, there are multiple examples in the literature of innova-tion adoption models (Ajzen, 1985; Edwards-Jones, 2006; Rogers, 1962). Despite the differences between them and the variety of drivers used to explain the adoption and diffusion of innovation, a key element of them is the willingness of farmers and the interventions needed to support their adoption of innovations. The organisa-tion of club supply chains, however, seems to entail the possibility that breeders might have a strong interest in selecting their suppliers; willing to pay the price to adopt the innovation might not be sufficient for farmers to join the club. In this respect, some insights might be offered by the literature dealing with the selection of suppliers, in particular explaining the mechanisms and potential criteria to be used to select the most suitable suppli-ers (Dey et al., 2015; Liu, Hai, 2005; Talluri et al., 2006). The definition of these criteria becomes key to select the most appropriate suppliers, considering that selecting “not-fit for the job” farmers might have negative con-sequences on the economic performance of breeders. The “market signalling” approach (Spence, 1973) might become a useful tool for breeders to set up the right cri-teria and correctly interpret them. Spence applied this approach to the job market, arguing that firms willing to hire employees with unobservable characteristics (such as work productivity) may solve the adverse selection problem by relying on “signals”. Signals are observable actions (such as college degree or training) taken by the employees with a cost that is inversely correlated with the desired unobserved characteristics (for example, the cost in time and effort of a college degree is expected to be lower for a productive worker) (Spence, 1973).If the signalling theory is transposed to the club supply chains, with the breeder being the employer and the farmers the employee, the same problem of infor-mation asymmetry applies. Breeders are not sure that farmers selected possess the right skills to implement the quality standards efficiently. They can become aware of farmers’ skills and evaluate them once the business relationship is already in place and, if needed, they can terminate the contract, but this might bring negative consequences, because of the time required before the farm selected starts producing and the time to replace them. If the selection process fails in a relevant number of cases, the breeder might not be able to fulfil market demand. Knowing the complexity of the club variety to be produced, breeders might decide to select farmers and base this selection on a combination of observable indices and signals.

DOI: https://doi.org/10.36253/rea-13407

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