Speaker
Description
Keywords: Voluntary sustainability standards, Private standards, Fairtrade, Organic, GlobalGAP
Introduction
The agri-food system faces numerous sustainability challenges, necessitating urgent transformation (Diaz-Bonilla et al., 2023). Amidst increasing price uncertainty, exacerbated by the COVID-19 pandemic, climate change and geopolitical instability, addressing these issues becomes increasingly complex. Recent events, such as the 2022 Ukraine conflict, have revived global concerns over agricultural market prices and volatility, echoing concerns from the food price crises of 2007-2008 and 2010-2011 (Osendarp et al., 2022). Past responses to such crises emphasized curbing food price volatility rather than food price levels, as reflected in the global political priority to ‘limit extreme food price volatility’ of the 2030 Agenda for Sustainable Development (United Nations General Assembly, 2015). This emphasis is due to universal disruptive impact of volatility on both producers and consumers, whereas high food prices impact countries unevenly, with negative repercussions for consumers but positive for agricultural producers (FAO et al., 2011; HLPE, 2011). The destabilizing effects of price fluctuations can hinder planning and investment decisions for producers, while consumers face challenges in budgeting and ensuring food security (Díaz-Bonilla, 2016).
The role of various market policies on price volatility remains a contentious debate in agricultural economics and the general public. So far, empirical evidence has focused on the effect of public policies on price volatility (Brander et al., 2023; Pieters and Swinnen, 2016). Private market-based instruments, such as voluntary sustainability standards (VSS), have hardly received attention in this literature and debate, despite the large focus on price and income effects of VSS, pointing towards moderately positive effects (Meemken, 2020; Oya et al., 2018; Traldi, 2021). VSS, such as Organic, Fairtrade and GlobalGAP, are market-based instruments aimed at improving and ensuring sustainability in global food production and trade. VSS are becoming increasingly prominent given the growing consumer demand for certified commodities, which now cover around 8% of global cropland (Kemper et al., 2023).
Conceptually, VSS adoption could affect price volatility for certified producers by influencing both the supply and demand sides. Regarding demand dynamics, VSS could enhance price stability by reducing information asymmetries, but might also increase price volatility by covering niche markets susceptible to shifts in consumer sentiment. Regarding supply dynamics, VSS implementation typically involves a higher level of coordination, investments, and specialization. This could render the VSS system more susceptible to supply-chain disruptions, unless there are clear long-term contracts or minimum prices between buyers and producers, which only Fairtrade requires. Supply-chain fluctuations may exacerbate in the context of reported oversupply problems (Boonaert and Maertens, 2023; de Janvry et al., 2015). Hence, we hypothesize that VSS adoption might increase price volatility unless existing contracts work well enough to reduce the risk of supply-chain disruptions.
Objective
In this study, we address the research gap by offering novel evidence on the effect of VSS adoption on producer price volatility. Additionally, we explore heterogenous effects among farm sizes, a dimension underappreciated in the scientific literature to date. Previous research has highlighted the importance and potential of certification in the large farm sector (Meemken, 2021). Certified large farms differ from certified small farms in the both the types of commodities produced and associated VSS (fruits and vegetables vs tropical commodities) and the market structure (more vertical coordination structures vs horizontal).
Method
We utilize a nationally representative farm survey of Peru spanning five years (2015-2019), covering multiple crops and VSS (Organic, Fairtrade, GlobalGAP, and various health and safety certifications). Employing fixed effects analyses, we account for time-constant unobserved heterogeneity and various time-varying observed control variables. Price volatility is measured as the coefficient of variation over consecutive years, based on self-reported producer prices. VSS adoption is measured as the self-reported certification status at the farm-level and linked with data from standard setting organizations to derive crop-level certification status. To distinguish between small and large farms, we rely on the Peruvian government’s threshold of 50 ha. Peru serves as an interesting case study due the country’s size, wide agrodiversity and surge in certification coverage over the past decade (ITC, 2024).
Findings
Overall, we find that VSS adoption increases price volatility of certified farms by 6%, with the increase primarily driven by large farms. Specifically, we observe a 16% increase in price volatility for certified large farms, while no significant effect is found for certified small farms. The heightened volatility among large farms can be attributed to several factors. Firstly, the certified fruits and vegetable sector witnessed large demand variability during our study period, notably evident during the wave of interest in “superfoods”, especially avocados (Gandhi et al., 2023). This surge led to heightened competition among new entrants attracted by the increased demand, thereby affecting supply dynamics. Moreover, certified large farms typically exhibit stronger vertical coordination with limited supplier diversity, rendering them more susceptible to supply chain distortions (Dalheimer et al., 2023). Furthermore, certified large farms predominantly hold GlobalGAP certification, which entails stringent and evolving requirements and are almost de facto mandatory to export fruits and vegetables to the EU and US (Henson and Humphrey, 2010). Any disruptions or discrepancies in meeting standard requirements could disrupt supply chains and lead to price fluctuations. In contrast, certified small farms, mainly Organic or Fairtrade certified, have the flexibility to sell part of their certified produce in non-certified (less volatile) markets, a strategy which could be employed during periods of oversupply, thus mitigating price volatility to some extent.
Conclusion
The extant literature on VSS has focused on price and income effects, often finding moderately positive effects, but this literature has not considered how stable these gains are, despite the importance of price volatility. Our findings underscore the importance of studying certification effects for both small and large farms, contrary to prevailing smallholder bias in the literature. Moving forward, policymakers and stakeholders must carefully consider the implications of VSS adoption, especially for large farms, which play a crucial role in global agricultural production. Further research is warranted to explore the underlying factors influencing price volatility of certified large farms and to identify potential avenues for mitigating its adverse effects on producers.
