World Development Vol. 37, No. 11, pp.

17421758, 2009
2009 Elsevier Ltd. All rights reserved.
0305-750X/$ - see front matter
www.elsevier.com/locate/worlddev

doi:10.1016/j.worlddev.2008.08.029

Farmers, Vertical Coordination, and the Restructuring of Dairy

Supply Chains in Central and Eastern Europeq
LIESBETH DRIES
Wageningen University, The Netherlands
ETLEVA GERMENJI
Katholieke Universiteit Leuven, Belgium
NIVELIN NOEV
European Commission, Brussels, Belgium

and
JOHAN F.M. SWINNEN *
Katholieke Universiteit Leuven, Belgium
Summary. The combination of transition and globalization since the early 1990s has caused dramatic changes in the dairy chains in
Central and Eastern Europe. This paper uses survey evidence from several Central and East European countries to document the growth
of vertical coordination in the dairy chain, its relationship with policy reforms, its eects and the implications for small farms. Evidence
suggests that in several countries small dairy farms have beneted from vertical coordination processes by providing them access to inputs and higher value markets.
2009 Elsevier Ltd. All rights reserved.
Key words Central and Eastern Europe, dairy, vertical coordination, processing, small farms

gence and implications of these modern supply chains. Our

analysis is based on survey data (both at the producer and
at the processor level) from several Central and Eastern European (CEE) countries, and concentrates on the dairy sector.
The dairy sector is a very important sector in all of these countries, particularly for poor farmers in rural areas.
The CEE countries provide a very interesting case to study
these developments since they all liberalized and privatized
their economies in the 1990s, providing a unique natural
experiment. The eects have been dramatic (albeit with important dierences between the countries). However, over the past
15 years, the combined forces of globalization and transition have, in all of these countries, caused dramatic changes
in the agrifood supply chains in terms of output, productivity,
employment, investments, product standards, the organization
of the supply chains, and the role of foreign investment. For
example, in 2004, half of the top ten destinations of foreign direct investment (FDI) by global retail chains were in Central
and Eastern European countries: Russia, Slovenia, Croatia,
Latvia, and Slovakia. Russia, for the second year in a row, received most FDI in retailing worldwide. Moreover, Hungary,
Poland and the Czech Republic were not among the top destinations because by then they were already mature markets, following massive investments in the previous years.
However, retail investments were only the latest foreign

1. INTRODUCTION
There is a rapidly growing literature on the impact of
expanding modern supply chainsoften following investments by multinational food and retailing companiesand
the associated growth of high quality and safety standards,
on farmers (Boselie, Henson, & Weatherspoon, 2003; Farina,
Gutman, Lavarello, Nunes, & Reardon, 2005; Mainville,
Zylbersztajn, Farina, & Reardon, 2005; Dries, Reardon, &
Van Kerckhove, 2007). Much of this literature points at the
problems which farmers in less developed regions of the world
face in dealing with the requirements and standards of these
modern supply chains (Henson, Masakure, & Boselie, 2005;
Henson & Reardon, 2005). Another part of the literature
emphasizes how changes in the organization of the supply
chain not only increase the requirements but also bring opportunities for small and poor farmers to access high-value
markets and that emergence of vertically coordinated systems
in these supply chains help farmers facing major market constraints to integrate in the modern supply chains (Maertens,
Dries, Dedehouanou, & Swinnen, 2007; Masakure & Henson,
2005). Evidence on both sides of this debate is limited to specic cases, countries, or sectors, and thus there is much need
for additional empirical evidence, in particular cross-country
evidence based on consistent survey data.
The objective of this paper is to contribute to this literature
by bringing together data from several countries, which have a
number of common characteristics that allow cross-country
comparisons, but have sucient variation to analyze how different initial conditions and institutions may aect the emer-

Disclaimer: This paper represents solely the view of the authors and in
no way the view of the European Commission or its services.
*
Final revision accepted: August 7, 2008.
1742

FARMERS, VERTICAL COORDINATION, AND THE RESTRUCTURING OF DAIRY SUPPLY CHAINS

investment wave. Earlier, much FDI had already gone into

other sectors of the food industry. By 2004, in the ten CEE
countries that have recently joined the European Union alone,
the stock of FDI in the food industry was more than 10 billion
Euro, of which the majority had gone to Poland, the Czech
Republic, Hungary and Romania. These are remarkable numbers. Only a decade ago, all of these economies were just
emerging from 40 years of state control of food markets.
Early on, studies suggested that these investments played a
major role in turning around the entire agrifood sector, including productivity and investments at the farm level through the
introduction of vertical coordination systems (Gow & Swinnen, 1998). While in early transition, privatization and company restructuring induced the collapse of the vertically
integrated systems that existed under the planned economy, later on new company structures and institutions have arisen.
These new structures used vertical coordination between processors and farms to overcome market imperfections at the
farm level which prevented farms from supplying the type
and standard of products modern processors and retailers
were interested in, leading in turn to improvements in quality
and productivity of farms. While the initial evidence was based
on case studies, later survey-based evidence largely conrmed
these insights for at least some countries (Dries & Swinnen,
2004; White & Gorton, 2006).
Still, important unanswered questions are (a) to what extent
are these ndings applicable to other countries, in particular
countries that faced dierent institutions and levels of development, and (b) to what extent are farmers, and in particular
small and poor farmers, included in or excluded from these
modern supply chains.
In this paper we draw on a much wider, and cross-country,
set of comparable survey data to address these questions. The
surveys were conducted in Albania, Bulgaria, Poland, Russia
and Slovakia, all CEE countries, but with very dierent levels
of income, progress in transition reforms, and structure of
dairy production (see further for details).
Our objective is to use these datasets (a) to systematically
document the emergence of vertical coordination in the dairy
chains, and how this diers between countries, farms, and companies, (b) to systematically document the type of exchanges
that are embedded in the vertical coordination, and how this
diers between countries, farms, and companies, and (c) to
identify eects of these modern supply chains and the associated vertical coordination processes on farms, in particular
on their in/exclusion, their access to inputs, and investments.
The paper is organized as follows. In the following section,
we describe the methodology that was used to collect the

1743

primary data. Next, we will present a brief overview of the

importance and structure of the dairy sector in CEE. The main
part of the paper however will deal with vertical coordination
in the dairy sector. First, we discuss the disruption of the dairy
chains in CEE countries during transition and the eects that
these disruptions have had on the sector. Furthermore, we report on the private vertical coordination initiatives that have
emerged to overcome these problems. Next, we present evidence on the impact of these vertical coordination mechanisms
on the farm sector. Special attention is given to the impact of
these developments on small farms in the region. To conclude,
we discuss a number of additional factors that potentially aect vertical coordination systems and dairy chain
restructuring.
2. METHODOLOGY
In the following sections we will present data that were collected in several countries using a multi-stage survey methodology. In the rst stage, interviews were conducted with rms
downstream in the dairy supply chain (e.g., dairy processors
and retailers). In the second stage, information collected in
the rst stage was used to design a farm survey. This survey
design was country-specic to take into account dierences
in farm structures. Sometimes more stages were necessary.
For example, in Bulgaria we found that dairy processors were
not contracting with farm households directly but rather with
owners of collection stations. This meant that information
needed to be gathered also on the level of the milk collection
stations in order to answer the research question.
First stage surveys were implemented in Albania in 2004, in
Bulgaria in 2003, in Poland in 2001 and in 2004, in Russia in
2004 and in Slovakia in 2003. The selection of these countries
reected the diversity in the countries in terms of level of
development, stage of reform, structure of the dairy sector,
and the importance of small farms (see Table 1). Poland was
most advanced in the transition process and received much
FDI already in the mid 1990s, leading to improvements in
standards, quality and investment in the dairy sector in the
second half of the 1990s. This was realized while the Polish
dairy sector had some larger corporate farms but the dominant production structure remained small family farms. The
average farm size was 11 cows per farm. Slovakia has a similar
level of income as Poland, but was lagging behind in the transition process due to poor government policy in the second
half of the 1990s. In addition, Slovakia has a totally dierent
farm structure than Poland with corporate farms dominating

Table 1. FDI and retailing in Eastern Europea Source: EBRD (2005) for GDP per capita and Share of Agriculture in GDP; EBRD (2003) for the EBRD
Reform Index, Authors survey results for the dairy indicators and FDI; USDA (2003), Authors calculations based on survey results and authors estimates
for FDI shares.
Country

Poland
Slovakia
Bulgaria
Russia
Albania
a

GDP
Share of agriculture EBRD reform
Dairy indicators
per capita
in GDP (%)
index
Average dairy Dominant
(USD)
farm
milk
size (# cows)
producers
6,324
7,639
3,109
4,012
2,372

2.5
5.0
9.4
5.0
26.8

3.5
3.3
3.3
2.9
2.6

11.0
340.0
1.6
215c
2.0

Family farm
Corporate
Family farm
Mixed
Family farm

Processing

Retailing

FDI (% of the
Main FDI FDI (% of the
Main
processed volume)
inow
retailing)
FDI inow
1530
62
5
<10
5b

199495
since 2000
since 1999
since 1998
2002

10
10
6
<5
0

199596
since 2000
19992001
since 2001

GDP per capita and share of agriculture in GDP: data for 2004; EBRD Reform index: data for 2002.
The dairy industry in Albania processes about 20% of total milk produced in the country.
c
Half of the milk is produced by households, which size according to ocial sources is in the range of 215 cows. Corporate farms, however, operate on
much larger scale (2001000 cows).
b

1744

WORLD DEVELOPMENT

the dairy sector and the average cow herd has 340 cows.
Albania represents the other extreme of the group with a very
low income (by CEE standards), a very large share of people
still active in agriculture, poor progress in transition, limited
FDI inow and small household farms: the average dairy farm
has 2 cows. Russia and Bulgaria are in between these extremes,
with a mixed farm production structure and moderate progress in transition and moderate inows of FDI in the dairy
sector (at the time of the surveys). The second stage surveys
were implemented in Albania in 2005, in Bulgaria in 2003
and in Poland in 2001. For comparative purposes, we chose
the extreme countries in terms of income and reform progress,
that is, Albania and Poland (and preferring Poland over
Slovakia because of the absence of small dairy producers in
Slovakia), and one of the intermediate countries, that is, Bulgaria (where we chose Bulgaria over Russia because of the
institutional and regional proximity of Bulgaria to Poland
and Albania to make comparisons less complicated).
(a) First stage data collection
Data collection at the rst stage was conducted through
semi-structured interviews with managers, owners or sales
and procurement ocers in dairy and retail companies. The
interviews covered a broad range of topics such as ownership
and management structure, product mix, structure of the supply base, policies and programs vis-a`-vis suppliers, product
quality and sales outlets. We selected dairy processors and
retailers to provide a mix based on size and ownership (domestically or foreign owned; private or cooperative).
Six Polish dairy companies were interviewed in 2001 in the
north-eastern region of Warminsko-Mazurskie, which is a major dairy region with mixed production structure (i.e., with
both large and small farms). Four were medium-size companies (5070 million liters of processed milk annually) with
one large (420 million liters) and one small (2.5 million liters).
Three were cooperatives, two private, and one a joint venture
of a cooperative and a private company. In terms of foreign
investment, two were majority foreign owned, and two have
important links to foreign companies. In 2004, a second set
of interviews was conducted. These included four of the top20 retail chains in Poland, all of which were foreign owned
and an additional two domestic retail chains. Furthermore,
the sample covered six dairy companies including two top-10
dairy processors and four medium-sized dairies, of which
one was foreign owned and three were cooperatives. Only
three of the interviewed dairy companies were both present
in the 2001 and the 2004 sample.
Six Slovakian dairy companies were interviewed in 2003 and
are located in West and Central Slovakia. Three are medium
companies (2542 million liters per year) and three are large
(75155 million liters per year). Four dairies are majority foreign owned, two are domestically owned companies. All interviewed companies have a private ownership structure.
The interviews in Bulgaria were conducted in 2003 and covered the whole Bulgarian territory. The 11 interviewed dairy
companies represent a mixture of large-scale (3 companies),
medium-scale (5 companies) and small-scale processors (3
companies). Two foreign owned dairies. Five of the interviewed dairy processors were newly established, the rest were
privatized during the 1990s. In 2003, these 11 companies
together have processed about 155 million liters of milk,
which was 21.4% of the total processed milk in Bulgaria in
that year.
Interviews in Russia (Moscow and St. Petersburg) were conducted in 2004. The meetings covered four foreign owned retail

chains and a cross-section of large, medium/large, and medium/small dairy companies, all selling dairy products to supermarket chains. One of the dairy companies is foreign owned.
Twelve dairy processors were interviewed in Albania in
2004. These companies represented a mixture of large-size
(8) and medium-size (4) dairy processors. Interviewed processors were operating in the districts of Shkodra (North Albania), Tirana, Lushnja, Kavaja, Durres (Middle Albania), and
Korca (South Albania). Three of the interviewed processors
were identied as leading companies in the dairy chain in
Albania in 2003. Two of the interviewed processors were
owned by foreign investors. All the interviewed processors
but one were newly established. All of the companies are privately owned.
(b) Second stage data collection
Second stage data collection was conducted through farm
household surveys using structured questionnaires in Poland,
Bulgaria and Albania. The survey instrument was designed
to capture a number of indicators of the farm operation, especially those that are related to vertical coordination in the
chain, and the evolution of these indicators over time. The following elements were covered: human capital characteristics of
the household, on-farm and o-farm labor supply, dairy livestock, milk supply, interactions with processors, milk quality
and hygiene indicators, on-farm investments, milk prices, asset
endowments (such as land and machinery), and additional social and cultural indicators. As the main objective of the survey design was to capture the evolution and the impact of
vertical coordination within the chain, all of the samples have
overrepresented commercial farms, that is, farms that market
at least part of their milk output. As a result, the smallest
farms (12 cows) will be underrepresented in our samples as
they often use their milk for home consumption only.
The farm-level data collection in Poland focused on small
suppliers and the survey was conducted in 2001 among 290
dairy producing rural households in the Warminsko-Mazurskie region in the North-East of Poland. Warminsko-Mazurskie was chosen because it is an important dairy region in
Poland. Only households which produced and delivered milk
to a dairy processor in 1995 were selected. The survey therefore also covers households that have stopped producing
and/or delivering milk to a processor since 1995. By using this
methodology we have tried to minimize sample selection bias
due to exits.
The households were selected randomly in certain municipalities but municipalities in the vicinity of a foreign owned
dairy processor were over-sampled. This was done because
we hypothesized that foreign investors were playing a frontrunner role in the Polish dairy sector and were major drivers
of the restructuring process in this sector. Furthermore, our
survey concentrated on those households which delivered at
least some milk to dairies (i.e., commercial farms) at the start
of the period covered by the survey (1995). As a consequence,
the smallest farms (12 cows) represent a smaller group in our
survey sample than on average in the region. However, even
with this selection focus, the vast majority of the farms in
the sample are very small by (West or East) European standards. The majority of farms in the sample (57%) had less than
10 cows and 96% of the farms had less than 20 cows in 1995
(see Table 2). The average size of dairy farms in the sample
was 8.8 cows in 1995 and 10.5 cows in 2000.
The Bulgaria survey at the milk supply level was conducted
in 2003 and covered the main dairy regions in Bulgaria, that
is, the north and the south central region. In 2001, this area

FARMERS, VERTICAL COORDINATION, AND THE RESTRUCTURING OF DAIRY SUPPLY CHAINS

Table 2. Farm size distribution in the survey samples, share of total farms
Source: Authors calculations based on survey results and national statistics.
Number of cows per farm

Poland, 2001
Total
Warminsko-Mazurskie
Sample

34

59

1019

>19

44.6
22
5.1

24.6
13.8
5.9

16.9
19.1
10.3

10
29.1
26.9

3.4
13.1
35.9

0.5
2.9
12.4

(35)

(69)

(>9)

Bulgaria, 2003
Total
Sample

70.7
26.4

20.1
31.3

7.4
29.1

1.3
7.9

0.5
5.3

Albania, 2004
Total
Sample

(14)a
99.7
25.9

(>5)a
0.3
42

(35)

22.2

(69)

6.2

(>9)

3.7

For Albania total only.

included 48.7% of all cows in the country and 43.8% of all milksupplying households. The concentration of milk buyers in
these regions is higher than in other regions and there is strong
competition for raw milk between the dairy processors. The
surveyed counties were Veliko Tarnovo, Pleven and Gabrovo
in the north, and Plovdiv, Haskovo and Stara Zagora in the
south. In 2002, about 32.2% of total milk that was processed
in Bulgaria was collected and processed in the surveyed counties. Villages were randomly selected. In total 227 dairy household farms were interviewed located in 19 dierent villages.
Table 2 shows the farm size distribution of the sample compared to the structure of the Bulgarian dairy farm sector. Again
we notice the under-representation of the smallest farms.
The Albania survey at the farm level was conducted in 2005
and aimed to collect data on small (household) milk suppliers.
Based on information provided by Albanian specialists at the
Ministry of Food and Agriculture as well as on the information collected through in-depth interviews with dairy processors, ve main dairy regions were identied in Albania:
Durres, Kavaja, Korca, Lushnja and Shkoder. All of these regions are represented in the data set. Within each region,
depending on its size and its importance for the processors/

1745

collectors, one or two villages were selected randomly. Furthermore, two additional villages were selected that were located close to urban areas and therefore had easy access to
these markets.
In total 326 dairy household farms, located in eight villages
were interviewed. Within each village, household farms were
selected randomly. Only farms that produced and delivered
milk either to a milk processor/collector or to the urban market in 2005 were selected. The sample obtained therefore does
not provide information on those farms that stopped producing and delivering milk before 2004. Although this potentially
creates selection bias (as the farms that may have been hit the
hardest by the restructuring process are those that are also
most likely to exit the sector), there was no other option because almost all of these farms were run by households that
had stopped their agricultural activities and migrated either
to other parts of Albania or abroad. As a result it was almost
impossible to trace and contact them. Table 2 gives an overview of the farm size distribution of the sample.
3. A BRIEF OVERVIEW OF DAIRY (REFORMS) IN
EASTERN EUROPE
Before going deeper into the analysis of vertical coordination in CEE dairy chains, it is worthwhile to briey introduce
the specics of the dairy sectors in the countries that are covered in our study. Dairy is an important sector in all countries.
However, milk production declined strongly in the rst years
of transition due to a combination of price liberalization
(including subsidy cuts) and privatization (including company
restructuring) (Figure 1).
First, with dairy production and consumption heavily subsidized under the communist regime, price and market liberalization induced a strong decline in demand and supply.
Second, this decline was reinforced by the disruptions associated with the economic reforms (see further). In combination,
they caused a collapse in output and in the number of dairy
cows. 1 In many Eastern European countries dairy cows declined with more than 40% and cow milk output went down
by around 25%. In most of the CEE, yields declined in the
early 1990s, but started increasing later and have grown robustly in most of the CEE in recent years (see Figure 2).

120

Bulgaria

100

Hungary
Poland

80

Cz R
Slovakia

60
Russia

40
1984- 1989 1990
88

1991 1992 1993 1994 1995 1996

1997 1998 1999

2000 2001

2002

2003

Figure 1. Change in cow milk output in selected CEE countries, %, 198488 = 100. Note: 1992 = 100 for Russia, and 198488 = 1993 for Czech Republic
and Slovakia. Source: Authors calculations based on FAOSTAT data.

1746

WORLD DEVELOPMENT
180

160
Bulgaria
Hungary

140

Poland

120

Albania
Cz R

100

Slovakia

80

Russia

60
1984- 1989 1990
88

1991 1992 1993 1994 1995 1996

1997 1998 1999

2000 2001

2002

2003

Figure 2. Change in cow milk yields in selected CEE countries, %, 198488 = 100. Note: 1992 = 100 for Russia, and 1993 = 100 for Czech Republic and
Slovakia. Source: Authors calculations based on FAOSTAT data.

Albania (and to a lesser extent Romania) is an exception to

this pattern as milk output increased rapidly since the start of
transition. One reason is that agriculture was much less subsidized than in the rest of the CEE before liberalization, and the
other reason is that the reforms triggered a complete collapse
of the former collective farms and a radical shift to household
farming (Cungu & Swinnen, 1999). In the rural areas of Albania, the shift to household dairy production was a coping
mechanism for poor households, leading to a rapid growth
of low quality dairy production.
Following the privatization in the 1990s, Central and Eastern Europe has now an interesting mix of private dairy structures. In many countries, the dairy sector is mainly based on
small-scale household production. In Poland, Bulgaria,
Romania, Albania and Moldova more than 85% (and in most
cases more than 95%) of all milk producers have less than 5
cows. A high share of their production is used for self-consumption and the remainder is often sold to dairies through
village collection points. The dairy farm structure is very different in Slovakia, Russia, Hungary and the Czech Republic
where there is a mix of small-scale farms and large-scale corporate farms. A large share of milk comes from large-scale
corporate farms. For example, in Slovakia in 1999 only 10%
of family farms had dairy cows and more than half of them
produced milk exclusively for self-consumption. On the other
hand, 81% of the large corporate farms had dairy cows and
100% of this milk production was sold.
Also at the processing level transition caused important
changes. Before transition, dairy processing was a state
monopoly, with processing facilities located in each major city.
Privatization initially caused major problems at the processing
level, leading to declines in output. Later, when private-sector
induced restructuring developed, investments increased and
quality improved throughout much of the CEE (see further).
However, the increased public and private standards and the
necessary capital requirements for the associated investments
are leading to consolidation in many countries. For example,
in Poland, the total number of dairy processing companies
with more than 50 employees went down by 22% during
199399. The strongest decrease was among the cooperative
processors, while the number of (non-cooperatively owned)
private companies doubled. Yet, cooperatives still controlled
70% of the dairy market in 1999 in Poland. In Bulgaria, the

changes started somewhat later: in 1999 there were still 570

dairy processors in Bulgaria, but since then, their number
has declined strongly in the following years: to 404 in 2001
and 341 in 2004. However, in Albania, a lower income country
where the growth of demand for high quality and standards is
much slower, there is a very dierent evolution. The number of
processors increased from 330 in 2000 to 379 in 2004 (Albanian Ministry of Agriculture, 2004). A large part of these companies are traditional and half-mechanized small processing
units (baxho) on the one hand and dairy plants with a processing capacity of 1070 tons/day on the other, with no cooperative processors among them.
4. THE DISRUPTION AND REORGANIZATION OF
DAIRY SUPPLY CHAINS
This section will discuss the importance of private institutional mechanisms to deal with problems of contract enforcement, imbalance between supply and demand for raw
materials, and other barriers to smoothing buyersupplier
relationships. Private systems have emerged that enhance vertical coordination between primary producers and processing
companies and as such mitigate the negative eect of the lack
of or inadequacy of public institutions.
First, the simultaneous privatization and restructuring of
farms, input suppliers, processors and retail companies caused
major disruptions in the exchange relationships in the dairy
chain during transition. 2 Examples of contracting problems
during transition were long payment delays or non-payments
for delivered products. Such payment delays caused drains
on much needed cash ow for suppliers. A survey of food
companies by Gorton, Buckwell, and Davidova (2000) found
that this was the number one business problem experienced by
companies in Central Europe in the mid 1990s. Our Bulgarian
and Albanian farm surveys conrm the importance of this
problem until quite recently. In Bulgaria, about one-third of
the surveyed dairy farms still experienced substantial payment
delays in the second half of the 1990s, on average between 70
and 80 days (see Table 3). The Albanian survey showed that
more than a quarter of the interviewed farms were experiencing payment delays in 1998. A standard reaction of the Albanian farms was to sell their milk directly into urban markets to

FARMERS, VERTICAL COORDINATION, AND THE RESTRUCTURING OF DAIRY SUPPLY CHAINS

Table 3. Structure and duration of the payment delays in the Bulgarian
dairy sector, 19942003 Source: Authors calculations based on survey
results.
Year

Farms with
payment delay (% of
all delivering farms)

Average length of the

Payment Delaya (days)

1994
1995
1996
1997
1998
1999
2000
2001
2002
2003

33.6
35.9
34.9
38.2
37.1
33.8
27.6
22.4
15.9
10.5

75
79
81
75
69
65
71
61
48
27

a
Farms that have never been paid for delivered milk are excluded from the
estimation.

get cash payments. This is consistent with ndings from other

countries, such as reected in the following quote: Romanian
farmers are holding back supplies of milk as they are experiencing considerable delays in being paid by processors and other
buyers. Many farmers have to wait more than two months to
be paid for their milk. Some started bringing milk into towns
themselves as they will get their money immediate (AgraFood
East Europe, March 2003, p. 23).
The problem seems to have declined signicantly in recent
years with investments in the dairy chain and improvements
in the general economic system. The data in Table 3 show a
substantial reduction in payment delay problems in Bulgaria:
falling to 27 days on average by 2003 and aecting only 10%
of the surveyed farms. In Albania, only about 15% of the surveyed farm households were still experiencing payment delays
in 2004.
One reason for the recent decline in farm payment delays is
the problem which dairy processors had in sourcing sucient
supplies, in particular of high quality. With the decline in the
number of animals and the problems dairy farms faced in
obtaining feed, credit and other inputs, the supply of milk,
and particularly high quality milk was often lower than the
processing capacity. In order to secure supplies, processors
were forced to pay farmers on time. Our interviews with dairy
companies conrm that one of the rst actions new investors
undertake as part of a company restructuring is to pay farmers
on time. 3
However this was not enough since the exchange problems
between processors and farms are worsened by the lack of
public institutions necessary to support market-based transactions, such as for enforcing contracts. As a result of these and
other exchange disruptions, companies lacked reliable supplies
of quality milk while farms faced serious constraints in accessing essential inputs (e.g., feed and capital) and in selling their
products.
Second, the shortage of supply of high quality milk, which
was typical of later stages of transition induced vertical coordination and farm support packages. The demand for quality
comes from public and private standards. 4 On the public side,
EU regulations and standards had a very important impact on
the dairy chains in accession countries and countries trading
with the European Union. 5 On the private side, modern processors and retail chains impose their private high standards
even in countries where consumers may not demand such standards in Central and Eastern Europe (Dries, Reardon, &

1747

Swinnen, 2004). There are several reasons for this. These companies use quality as a strategic tool and as an instrument to
dierentiate their products from competitors. Another reason
is that consistent quality standards reduce transaction costs in
cross-border supply chains. Private standards also act as a
substitute for missing public standards, infrastructure, and
institutions.
The relationship between public and private standards is
nuanced. In several cases public and private standards are
complementary (Fulponi, 2007). For example, Van Berkum
and Bijman (2006) nd in their survey of food multinationals
in Eastern Europe that these companies demand that their
suppliers comply with both public and company specic quality standards. In order to reach the required quality levels,
most of these companies have developed programmes to assist
farmers to improve their production methods.
Third, in the absence of appropriate public institutions, private contractual initiatives have emerged to overcome the
problems which processors faced in sourcing high quality supplies and that farms had in producing according to the requirements. 6 A strategy to address these problems typically
involved some form of vertical coordination. Successful vertical contracting has taken many forms, but has typically included conditions for product delivery and payments as well
as farm assistance programs for suppliers. 7 Dairy processing
companies, often as part of their own restructuring, started
contracting with the farms and provide inputs in return for
guaranteed and quality supplies.
Farm assistance programs have taken many forms including, in some cases, input supply programs, investment assistance programs, trade credit, 8 bank loan guarantee
programs, extension services, and management advisory services. Tables 4 and 5 show the forms of investment assistance
being oered by dairy companies to their suppliers in Poland,
Slovakia, Bulgaria, and Albania.
In Poland, each of the dairies has an input supply program
in which they provide access to inputs such as feed (or seeds
and fertilizers for on-farm feed production). Five out of six
companies assist farm investment through credit programs.
Most of the companies also provide extension services to their
suppliers. Five of the dairies provide guarantees on bank loans
made to farmers, most of which include preferential interest
rates. Most companies also co-sign bank loans when farmers
lack sucient collateral.
In Slovakia, all dairies assist farms through credit programs
for dairy-specic investments. Three of the six interviewed
companies assist their suppliers in accessing inputs. Most of
the companies also provide extension services. Three of the
dairies provide guarantees on bank loans made to farmers.
The respondents indicated that they oer these types of programs in order to upgrade milk quality and to secure their supplier base against loss to other dairies who do oer these
valuable services.
Even in Bulgaria, the country considerably less advanced in
reforms and transition at the time of the survey, most of the 11
interviewed dairies oer assistance to their suppliers. Nine
companies assist farms through credit programs for dairy-specic investments, with two of these indicating that they also offer credit for general investments. Ten of the selected dairies
assist their suppliers in accessing inputs for on-farm feed production. The majority also provides extension services. Five
out of the 11 companies oer bank loan guarantees. Securing
the supply base is indicated as the main reason for oering
these programs in almost all cases. 9
Table 5 shows that during 19942002 the share of companies oering assistance has increased substantially in all three

1748

WORLD DEVELOPMENT
Table 4. Farm assistance programs oered by dairy companies Source: Authors calculations based on survey results

Company name

Creditspecic

Creditgeneral

Input supplya

Extension service

Veterinary service

Bank loan guarantee

Y
Y
Y
Y
Y
Y

Y
N
Y
Y
Y
Y

N
N
N
N
N
Y

Y
Y
Y
N
Y
Y

Poland
Mlekpol
Mleczarnia
Kurpie
Mazowsze
ICC Paslek
Warmia Dairy
Bulgaria
Merone
Fama
Mlekimex
Danone
Iotovi
Milky World
Markelli
Mandra Obnova
Meggle
PRL
Serdika 90
Slovakia
Liptovska
Mliekospol
Rajo
Levicka
Tatranska
Nutricia Dairy

Y
N
Y
Y
Y
Y
Y
Y
Y
Y

(2000)
(1994)
(1997)
(1997)
N
(1999)
(1999)
(1998)
(2001)
N
(1997)

N
N
Y(1998)
N
N
Y(2000)
N
N
N
N
N

Y (n.a.)
Y (1994)
Y (1997)
Y (1998)
Y (1995)
Y (1999)
Y (1998)
Y (2000)
Y (2001)
N
Y (1997)

Y (1992)
N
Y (1999)
Y (2000)
N
Y (1999)
N
Y (2000)
Y (2001)
Y (2002)
Y (1997)

N
N
Y (1997
Y (1995)
N
N
N
N
N
N
N

Y
Y
Y
Y
Y
Y

(2000)
(1999)
(2001)
(1998)
(2001)
(2000)

N
N
N
N
N
N

N
N
Y/N
Y (1998)
Y (2000)
N

Y
Y
Y
Y
Y

N
Y (1992)
N
N
N
N

Y
Y
Y
Y

(1994)
(1992)
(1992)
(0000)
(0000)
N

Y
Y
Y
Y
Y

N
(once)
(1998)
(1999)
(1995)
(1999)
N
N
N
N
N

N
Y (1992)
N
Y (1998)
N
Y (2000)

Either the company provides inputs and the farmer pays back later, or the company oers forward credit, which the farmer uses to buy inputs.
In Poland no distinction is made between credit for dairy-specic investments and general investments. Farm-level evidence shows that the dairy
companies mainly support dairy-specic investments.

Table 5. Share of interviewed dairy companies having assistance programs, in % Source: Authors calculations based on survey results.
Credit

Inputs

Extension

Veterinary

Bank

Total

1994

PL
SK
BG

50
0
9

67
0
18

50
83
9

0
17
0

50
17
0

43
23
7

1998

PL
SK
BG

83
17
45

100
17
64

83
83
18

17
17
18

83
33
18

73
33
33

2002

PL
SK
BG

83
100
82

100
33
91

83
83
73

17
17
18

83
50
36

73
57
60

countries. Dairy companies in Poland implemented assistance

programs already in the mid 1990s. In Bulgaria, the number of
dairy companies oering assistance increased gradually. In
Slovakia, the increase in assistance accelerated after 1998,
when there was a major change in government and important
policy reforms inducing more market credibility and also increased inows of FDI. Programs initiated through the use
of FDI may have forced local dairies to implement assistance
programs in response to increased competition as well as providing examples for local dairies to emulate.
We also nd that there is a clear dierence in the type of programs that are oered rst. Programs which are relatively easy
to implement and which address the basic supply constraints,
such as feed and input supply and extension are introduced
rst. Investment loans and bank loan guarantee programs,
which are obviously more complex to introduce and to man-

age, are introduced later. For example, in 2002 almost all of

the interviewed Bulgarian processors provided credit and inputs and extension services, but only one-third provided bank
loan guarantees.
In Albania, our survey shows that there has so far been very
little vertical coordination in the dairy chain. 10 One reason for
this is the lack of quality standards in Albanian dairy production, reecting the low level of income and therefore the low
demand for quality. There is no functioning system for the
control of raw milk. Despite the legal requirement, dairy farms
do not have the quality of their milk checked on a regular basis in state laboratories. Results from our survey showed that
only 19% of the interviewed farms had ever brought milk for
quality testing to the certied laboratories. Another reason
may however be the relatively slow progress in reforms and
institutions.

FARMERS, VERTICAL COORDINATION, AND THE RESTRUCTURING OF DAIRY SUPPLY CHAINS

Fourth, the previous analysis shows how dairy chain

restructuring is aected by investments in processing and the
stages of transition. Obviously, all these factors are themselves
aected by more fundamental changes, such as reforms that
have inuenced the investment climate, market imperfections
and constraints, all of which had an important impact on
the dairy chain restructuring and investments. Reforms and
the policy environment are crucial for investment and contracting and vertical coordination because they are needed to
secure property rights, macro-economic stability and to facilitate contract enforcement. This can be concluded from a comparison of farm assistance programs in countries at various
reform stages. To estimate the cross-country impact of reforms on vertical coordination, we compared the importance
of vertical coordination, as measured by our surveys (see Tables 4 and 5), and an index of reform progress estimated by
EBRD. This relationship is shown in Figure 3 which indicates
a strong and close positive relationship between the progress
in economic reforms and vertical coordination in CEE in the
dairy sector.
5. FARM PRODUCT QUALITY AND INVESTMENTS

Assistance (% interviewed
companies)

In this and the following section we will present some evidence on the impact of these vertical coordination mechanisms
on the farm sector, especially on small farms. The impact can
be shown through dierent indicators: business conduct vis-a`vis the farmer, quality of products, productivity or on-farm
investments. The impact of these vertical coordination innovations is dicult to quantify as several other factors aect output simultaneously and as company level information is
dicult to obtain. Still, the evidence we collected from the surveys and a series of case studies suggests that successful vertical coordinating (through the enhanced access to inputs and
improved management) has important positive eects, both
direct and indirect, on-farm productivity, quality and investments.
Figure 4 shows how milk quality rose rapidly following contract innovations by dairy processors that were introduced in
Poland in the mid 1990s, in Bulgaria at the end of the 1990s
and in Russia in 2000. In Poland, the share of the market held
by highest quality milk increased from less than 30% on average in 1996 to around 80% on average in 2001. In Bulgaria,
extra quality milk increases from 17% on average in 1997 to
34% in 2003 combined with a decline in the average shares
of the lowest quality milk, from 20% in 1997 to 10% in
2003. In the Russian Campina factory, the share of the highest

90
80
70
60
50
40
30
20
10
0
2

2.5

3.5

EBRD Reform Index

Figure 3. Impact of economic reforms on-farm assistance programs in the
CEE dairy sector. Data include observations from Albania, Bulgaria, Poland
and Slovakia. Source: Authors calculations based on survey results.

1749

quality milk increased from 6% in 2000 to 55% in 2004, while

the lowest quality fell from 37% to less than 10% over the same
period.
Specialist storage in the form of new collection centers or
on-farm cooling tanks has been particularly important in raising yields and quality in the dairy sector (Dries & Noev, 2006;
White & Gorton, 2006). In Poland, farm loans from dairy
companies and loan guarantee programs contributed strongly
to farm purchases of cooling tanks and other dairy-related
investments in small and medium dairy farms in Poland (Dries
& Swinnen, 2004). Seventy-six percent of all farms made
investments in the past years after vertical coordination was
implemented, including many small farmers. Of those that invested, 58% used loans for investments in enlarging and
upgrading the livestock herd (30%) and cooling tanks (56%).
Also, programs which assist farms in accessing inputs (mainly
feed) enhance investment indirectly by lowering input costs, or
reducing transaction costs in accessing inputs, and consequently, through improved protability. Figure 5 illustrates
the strong impact on investment in equipment, in particular
cooling tanks, for small dairy suppliers.
In Bulgaria and Albania, the use of farm loans and loan
guarantees is playing a much more limited role in stimulating
on-farm investments. The Bulgarian household survey shows
that about two-thirds of the dairy households (63%) have invested in general agricultural and/or in dairy assets over the
last decade. Herd size matters for investment decisions. Almost half of the farms with 12 cows have never invested during the observed period. All farms with more than 15 cows,
however, have invested in dairy assets. However, the majority
of these investments was nanced using own resources. Similarly, almost three quarters of the surveyed dairy farms in
Albania have made investments in the period 19952004.
However, of those that invested, 76% used own resources to
nance the investment, 12% used remittances from family
members abroad, and another 8% used loans from relatives.
6. (SMALL) FARMERS IN THE CHAIN
A key concern is that this process of vertical coordination
will exclude a large share of farmers, and in particular small
farmers (Dolan & Humphrey, 2000; Reardon & Berdegue,
2002; Weatherspoon & Reardon, 2003). There are three
important reasons for this. First, there is an important xed
transaction cost component in costs of exchanges between
farms and companies, making it more costly for companies
to deal with many small farmers than with a few larger suppliers (Holloway, Nicholson, Delgado, Staal, & Ehui, 2000; Runsten & Key, 1996). Second, when some level of investment is
needed, small farms are often more constrained in their nancial means for making necessary investments, either because
they do not have sucient own resources or because they have
problems accessing external funds in imperfect rural nancial
markets. Third, small farms typically require more assistance
from the company per unit of output, because they may lack
essential management capacity or investments. For example,
before the vertical integration process started, large dairy
farms in Slovakia had cooling tanks and dairy specialists,
while small Polish dairy farms had neither.
What empirical evidence do our surveys provide on this issue of exclusion of small farms? Our surveys and interviews
with companies generally conrm the main hypotheses that
transaction costs and investment constraints are a serious consideration. Companies express a preference for working with
relatively fewer, larger, and modern suppliers. However, our

1750

WORLD DEVELOPMENT

Top quality*

Bottom quality*

a. Poland

100

100

80

80

60

60

40

40

20

20

0
1996

1998

2001

1996

1998

2001

1997

2000

2003

b. Bulgaria
100

100

80

80

60

60

40

40

20

20

1997

2000

2003

c. Russia**
100

100

80

80

60

60

40

40

20

20

0
2000

2400

2000

2400

Figure 4. Change in milk quality in CEE. Note: *Average share in total milk supply; **milk deliveries to the Campina factory in Stupino. Source: Authors
calculations based on survey results.

empirical observations also show a very mixed picture of actual contracting, with much more small farms being contracted than predicted based on the arguments above.
Companies in reality work with surprisingly large numbers
of suppliers and of surprisingly small size.
To analyze this further, Figures 68 summarize the dynamics of the size distribution of the dairy farms in our surveys in
Poland, Bulgaria and Albania. There are some important
observations. First, the changes are modest to small, which

suggest a gradual adjustment process in all three cases. Second, the adjustment process in farm distribution in Albania
(without modern supply chains) and Bulgaria (with) is very
similar, with a reduction in the number of very small farms
(one cow in Albania and two cows in Bulgaria) and a small increase in the (somewhat) larger farms, suggesting a gradual
growth in size of the farms throughout the sample. When we
compare the characteristics of the farms which grow in the
Bulgarian data with those who do not, we nd no signicant

100
Mlekpol
Lowicze
Mazowsze
Kurpie

80
70
60
50
40
30

1998

120

2004

100
80
60
40
20
1

3-4

5-9

>9

herd size

10
0
1998

2001

2003

Figure 5. Growth in dairy farm investments in Poland 19952003 (% of

suppliers with own cooling tanks for Northern Polish dairies). Source:
Authors calculations based on survey results.

Poland

140

Number of farms

140

20

1995

120

1995

100

2000

80
60
40
20
0
1

3-4

5-9

10-19

>19

herd size
Figure 6. Size distribution of dairy farms in total survey sample from
Poland. Source: Authors calculations based on survey results.

Bulgaria

120

Number of farms

1751

Albania

160

90

Number of farms

Share of suppliers with own c.t. (%)

FARMERS, VERTICAL COORDINATION, AND THE RESTRUCTURING OF DAIRY SUPPLY CHAINS

100

1998

80

2003

60
40
20
0
1

3-5

6-10

11-15

>15

herd size
Figure 7. Size distribution of dairy farms in total survey sample from
Bulgaria. Source: Authors calculations based on survey results.

dierences. Third, the changes in Poland show a similar development: the majority of farms in 1995 had between 5 and 19
cows. Those farms have grown on average, reducing their
number and leading to an increase of the number of larger
farms. In Poland there is some increase in the number of very
small farms, which captures those which are not being included in the new markets. This phenomenon also occurs in
Bulgaria where the number of farms with only one cow has increased. Of the 283 households in the Polish sample that delivered milk to dairy processing companies in 1995, only 36
(13%) stopped delivering milk between 1995 and 2000. Ten

Figure 8. Size distribution of dairy farms in total survey sample from

Albania. Source: Authors calculations based on survey results.

of them (4%) stopped producing altogether while the rest kept

some cows for home consumption. 11 Hence, 87% continued
delivering to dairies despite radical restructuring of the dairies
and tightened quality demands. To provide more substantive
evidence on this, an econometric study based on the Polish
survey (see Dries & Swinnen, 2004) showed that vertical coordination had a positive impact on the survival and growth of
small dairy farms.
In addition to these insights, it is interesting to note the difference between cooperative dairy companies and investor
owned dairies. Dries and Swinnen (2004) nd that suppliers
delivering to cooperatives were more likely to survive in the
restructured dairy chain because it is more dicult for cooperatives to refuse to take milk from their suppliers, which are
typically cooperative members. This suggests that at least part
of the exits from the sector were involuntary. However, in
terms of assistance programs and the eect of these programs
on the farmers, no evidence was found that cooperative dairies
were more likely to set-up assistance programs for their suppliers than private rms.
Other studies pointing at challenges facing small farmers in
evolving modern supply chains nd that small and medium
farmers can be successfully integrated in the dairy chains, with
processing and trading companies actively investing in institutions and infrastructure to reduce transaction costs, such as
collection centers. For example, van Berkum (2006) explains
how Friesland Romania, a subsidiary of the Dutch multinational dairy group, entered the Romanian market in 2000,
and three years later purchased milk from approximately
40,000 small farmers through 1,050 collection points and from
some 600 larger farms, operating ve factories. Friesland owns
the collection points and upgraded them by investing in cooling and inspection facilities. Also White and Gorton (2006)
nd no evidence that small farmers have been excluded over
the past six years in developing supply chains in ve countries
(Armenia, Georgia, Moldova, Russia and Ukraine). In the
vast majority of cases companies have the same or even smaller farmers in 2003 than in 1997. In fact, 57% of the processors
have more small suppliers in 2003 than in 1997. Moreover, the
processing companies indicate, on average, that they are not
likely to cut suppliers in the future. 12
Often, supplier programs dier to address characteristics of
varying farms. For example, dairy processors provide investment support for somewhat larger farms, including leasing
arrangements for on-farm equipment, while assistance programs for smaller dairy farms include investments in collection
units with micro-refrigeration units.
More sophisticated supplier assistance programs tend to be
more available for larger farms. In Slovakia, three out of six

1752

WORLD DEVELOPMENT

interviewed companies said that farms need to have a minimum size to qualify for investment support; one indicated that
only the bigger and better quality suppliers were allowed to
use the (forward) credit program. In Bulgaria, ve domestic
dairies indicate that they set a minimum size for farms to qualify for their programs. Danone explicitly limits assistance programs to contracted suppliers. Meggles programs are limited
to large suppliers by default since only farmers with large milk
quantities can deliver to Meggle.
Also White and Gorton (2006) nd evidence that better and
more assistance seems to go to larger farms, although there is
signicant variation with the type of assistance. 13 For example, there is little dierence in the provision of quality control,
guaranteed prices, agronomic support, prompt payments, or
even farm loan guarantees between small and large suppliers.
However, the majority of companies operate a minimum supplier size requirement for providing credit, physical inputs or
machinery.
Hence, despite the apparent disadvantages noted earlier, the
empirical evidence suggests that vertical coordination with
small farmers is widespread. The question is why? There are
several reasons.
First, the most straightforward reason is that companies
have no choice. In some cases, small farmers represent the vast
majority of the potential supply base. For example, over 95%
of dairy farms in Albania, Bulgaria and Romania have less
than 5 cows. Hence any dairy processor needs to deal with
small farms by necessity, focusing, for example, on investments in collection points rather than on on-farm equipment.
Second, processors may prefer to deal with large farms because of lower transaction costs in, for example, collection
and administration, but contract enforcement may be more
problematic, and hence costly, with larger farms. In several
interviews company managers indicated that (smaller) family
farms were less likely to breach contracts or to divert company
investments than large cooperatives or farming companies.
Therefore, processors may prefer a mix of suppliers.
Third, small farms may have cost advantages in labor intensive, high maintenance, production activities such as dairy.
Fourth, processing companies dier in their willingness to
work with small farms. Some processing companies work with
small suppliers even if others do notthis may reect the companies roots as cooperative organizations. Both our interviews and other studies suggest that there are substantive
dierences in company strategies in dealing with small
farms. 14 This also implies that small-scale farmers may have
future perspectives when eectively organized.
That said, even companies willing to invest in upgrading
small farms only go so far, and tend to have a strategy in
the long run to upgrade part of their supply base to larger,
more ecient, and fewer suppliers. Yet, in countries like Poland, Romania, and many CIS countries dominated by household dairy production, large is a relative concept: in
Romania, large farms are farms with more than ve cows. . .
The evidence presented so far suggests an interesting paradox. Small farmers in CEE countries may not be able to make
the necessary upgrades to satisfy the demand of modern supply chains without support packages by processors or agribusiness. If there are sucient (quality) supplies available
for processors, they have no interest in introducing such vertical coordination support packages. If there are not sucient
supplies, vertical coordination will be forthcoming. Hence,
we have the paradoxical situation that small poor farms may
be best o (in the perspective of supply chain driven development) if they are in an environment which is dominated by
small nancially constrained farms.

There is some, albeit ad hoc, empirical evidence for this

hypothesis. Companies seem to be most likely to reach out
to small farms when they face a supplier base which is dominated by small farmers that are unable to supply the required
commodities, and least likely when there is a heterogeneous
farm structure with a number of farms that are able to deliver
the desired supplies. International dairy companies and foreign investors target larger farms as their preferred suppliers
and only reach out to smaller suppliers if they need them to
secure supplies. For example, in the case of dairy processors,
the same processors have dierent minimum size thresholds
for dierent countries, reecting the structure of the farm sector in these countries. In countries with many medium and
large farms, suppliers may have to have more than 20 cows
to supply; in Poland, with many small farms, more than 5
cows, and in Bulgaria and Romania, where almost the entire
herd is in semi-subsistence farms, processors work with farms
with 2 cows.
7. EXTENSIONS AND DISCUSSION
In this section we discuss the role that foreign direct investment (FDI) in the dairy processing sector, and the rise of the
supermarket sector have played in restructuring the dairy sector. Furthermore, we discuss some more complicated models
of vertical coordination that have emerged in the region. Finally, we point at the importance of competition in the sector
in driving equal rent distribution throughout the chain.
Foreign direct investment has played a crucial role in the
restructuring process in Eastern Europe as an engine of
change. A detailed analysis of the impact of FDI in the Polish
dairy sector (Dries & Swinnen, 2004) showed that FDI has
been an important driving factor behind dairy chain restructuring and vertical coordination programs. Foreign investment plays an important role as an initiator of change and
institutional innovation. The introduction of basic forms of
vertical coordination requires access to outside nancial
sources, which foreign investors have. Also, more sophisticated forms of vertical coordination, with a greater emphasis
on quality and standards, are often introduced by foreign
companies because they tend to pay greater attention to quality standards.
However, spillover eects lead to convergence. In the Polish
dairy sector in the mid 1990s there was a signicant dierence
between foreign owned processors and local processors.
By 2001 this gap had disappeared largely as domestic companies started copying the management practices of foreign aliates.
There are considerable dierences between the countries in
the importance of FDI. In the CEE dairy sector, FDI has resulted from several company strategies, for example, to serve
the local market when trade constraints limit imports, or to
use the domestic economy advantages for exporting to the
home market of the foreign company or to third markets.
The EU accession process further stimulated FDI because it
reinforced the institutional and economic stability, the prospect of a large single market, growth in incomes and food demand, andin some casesexpectations of EU subsidies
(Walkenhorst, 2001).
Poland has attracted signicant FDI in the dairy sector in
the mid 1990s, yet at the same time local companies continue
to have a large share of the market. The liberalization of the
Polish trade system and the privatization of the processing
industry in the 1990s opened the Polish dairy sector to increased competition from abroad, allowed Polish exporters

to search for new markets, and allowed foreign companies to

invest in the Polish dairy sector, with major eects.
In Slovakia, most foreign investments have taken place since
2000. This is late compared to Poland, where a major inow of
foreign investors in the sector occurred already in the mid
1990s (Table 1). This is due to the political environment in
the mid 1990s. Slovakia was the only of the 10 CEE applicants
for EU membership that failed to meet the political criteria for
EU entry. After a regime change in 1999 created a more stable
investment climate, FDI poured in. By 2003 77% of milk purchased in Slovakia was processed by foreign owned dairy companies (Agra Europe, April 2003). Many of them are
multinational companies: Sole, Italy; Meggle, Germany; Bongrain, Danone and Fromageries Bel, France; Artax, Austria;
Friesland Coberco, Netherlands; and Amine Aour, Lebanon
(Table 6).
Also in Bulgaria and Albania FDI arrived relatively recently. Bulgaria had a severe economic crisis in the mid
1990s, constraining FDI inow. In Albania, where FDI is still
burdened with high transaction costs and administrative barriers, our survey found that in 2004 Greek and Italian investors have entered the market aiming at the creation of new,
middle- or large-scale processing facilities, following the intensive FDI inow from 2002 (Table 1).
Russia is a mixed case. Foreign investments in the Russian
dairy sector started in the mid 1990s by Western European
dairy producers (Hochland (1994), Danone (1995)), but really
picked up after 1998 (Ehrmann (1999), Campina (2000), Onken (2003), Lactalis (2002) and Lacto (1998)). In recent years,
a strong competition in the dairy sector exists among the main
foreign owned dairy processors operating there and large
domestic processors such as Wimm Bill Dann. This is especially true for the regions of Moscow and St. Petersburg with
considerable investments in the dairy sector.
The absence of foreign or domestic investments typically reects either lack of interest because of low incomes or political
or economic instability, insecure property rights, and the ab-

Share of modern retail in total (%)

FARMERS, VERTICAL COORDINATION, AND THE RESTRUCTURING OF DAIRY SUPPLY CHAINS

1753

60
50
40
30
20
1998
10

2002

0
2

2.5

3.5

EBRD Reform Index

Figure 9. Impact of economic reforms on the growth of the modern retail
sector in CEE. Note: Correlation (R2) is 0.79. Data include Bulgaria,
Croatia, Czech Republic, Hungary, Poland, Romania, Russia, Slovakia,
Ukraine. Source: Authors calculations based on survey results.

sence of key reforms. 15 Figures 9 and 10 relate FDI inows

by multinational retailers in CEE to country incomes and to
transition reform progress (as measured by the EBRD reform
indicator) and nds strong positive correlations with both factors.
Have (foreign owned) dairy processing companies or supermarket chains been the main drivers of change in the dairy sector? We do not have conclusive evidence on this, but our
interviews with dairies and supermarket chains do provide
some insights. First, supermarkets represent an important outlet for the dairy companies in CEE. 16 For example, Table 7
shows that even in Bulgaria, where FDI in retailing started later than in Central Europe small and large dairy processors
sell to (foreign owned) supermarket chains and all of them sign
contracts with these supermarket chains. Second, changing

Table 6. Structure of the Slovakian dairy processing sector, 2003 Source: Authors calculations based on survey results.
n
Mliekospol, a.s.
Tamilk, a.s.
Sole Slovakia, a.s.
Rajo, a.s.
Liptovska Mliekaren, a.s.
Zvolenska Mliekaren, a.s.
Milex Nove Mesto nad Vahom, a.s.
Zempmilk, a.s.
Prievidzska Mliekaren, a.s.
Milsy, a.s.
Nutricia Dairy, s.r.o.
Laktis, a.s.
Milex Galanta, a.s.
Danone, s.r.o.
Senicka Mliekaren, a.s.
Levicka Mliekaren, a.s.
Milkagro, s.r.o.
AGW Milk, a.s.
Humenska Mliekaren, a.s.
Gemerska Mliekaren, s.r.o.
Tatranska Mliekaren, a.s.
Tvrdosinska Mliekarin, s.r.o.
Other

Location

Majority owner

FDI since

Market sharea (%)

Nove Zamky
Trnava
Bratislava
Bratislava
Liptovsky Mikulas
Zvolen
Nove mesto nad Vahom
Michalovce
Prievidza
Banovce nad Bebravou
Nitra
Zilina
Galanta
Modranka Trnava
Senica
Levice
Presov
Trebisov
Humenne
Rimavska Sobota
Kezmarok
Tvrdosin

95% Sole, Italy

100% Sole, Italy
99% Sole, Italy
51% Meggle, Germany
97% Bongrain, France
100% Bongrain, France
51% Cooperative (49% Bongrain, France)
91% Fromageries Bel, France
95% Artax, Austria
95% Artax, Austria
100% Friesland, Netherlands
(9% Friesland, Netherlands)
100% Amine Aour Middle Foods, Lebanon
100% Danone, France
67% Cooperative
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
???

2002
2001
2001
1993
2000
2001
2001
2000
2000
2001
2000
2002
2002
2000

8
4
4
13
6
4
4
7
4
4
4
5
3
1
4
4
4
3
4
1
2
4
3

Note: a.s. = corporation; s.r.o. = Limited Liability Company.

a
Estimate.

1754

WORLD DEVELOPMENT

Share of modern retail in total (%)

60
50
40
30
20

1998

10

2002

0
0

1000

2000

3000

4000

5000

6000

7000

GDP/capita (USD)
Figure 10. Income per capita and growth of the modern retail sector. Note:
Correlation (R2) is 0.82. Data include Bulgaria, Croatia, Czech Republic,
Hungary, Poland, Romania, Russia, Slovakia, Ukraine. Source: Authors
calculations based on survey results.

procurement systems by modern retail chains had a substantial impact on dairy processors. Interviews with dairy companies in Russia and Poland showed that dairies have
substantially diversied their product range as a result of demands and opportunities at the retail level. Furthermore,
dairy companies that used to be limited to selling their products locally are now increasingly nding nation-wide distribution possibilities through the retail sector. Apart from the
opportunities, the retail sector imposes specic requirements
in terms of commercial relations (contracts) as well as production, and post-production technologies.
However, the question remains whether supermarkets are
also driving structural changes at the farm level. In order to shed
some light on this issue, we look at the timing of market entry of
foreign owned dairy processors (as was shown earlier, these
have often acted as initiators of institutional change) and the
multinationalization of the supermarket sector. In Poland, the
dairy sector attracted foreign investors early on in the transition
period: Unilever in 1991; Danone in 1992; Nutricia and Bon-

grain in 1993; Kraft, Hochland, Scholler and Land O Lakes

in 1994; Yoplait and Hoogwegt in 1995. 17 Foreign investments
in the retail sector on the other hand, peaked during 199596
with major investments by chains like Ahold and Rewe.
Furthermore, we found no evidence during our interviews in
Poland that the implementation of dairy assistance programs
was directly linked to the increasing importance of the supermarket sector. In general, the assistance programs were initiated in the rst half of the 1990s, while the major foreign
supermarket chains entered the market later on. Rather, dairy
processors frequently stated that upgrading their supplier base
(through the use of assistance programs or strict quality policies) was guided by their wish to gain access to the EU market
(i.e., to acquire an EU export license) or by the EU accession
process more in general. This seems to be the general picture in
the more advanced transition countries such as Poland, the
Czech Republic and Hungary. 18
In Russia, which was not aected by EU accession and the
associated integration of standards and markets, the picture is
somewhat dierent and the supermarket sector is having a real
impact throughout the dairy supply chain. Interviews with
processing companies showed that supermarkets were putting
cost and quality pressures on them, considerably beyond their
non-supermarket outlets. This was particularly the case for the
dairy systems outside of the main consumer markets (such as
Moscow and St. Petersburg). The spread of the major retail
chains to the provinces happened before modern dairy investments. In these regions, it is the retailers that are the frontrunners and who are driving the changes. Metro, Ramenka and
all of the large local retailers have recently been investing
heavily in major cities all over Russia. The modern dairies,
and especially foreign dairy investors, are still struggling to
get their quality chains organized around Moscow where there
is a strong competition to get the good milk suppliers.
In summary, in countries close to the European Union
(either geographically or in view of the accession process),
the restructuring of the dairy chain was mostly driven by
investments in processing, while in countries further from
the European Union, and less advanced in transition, retail
investments are playing a more important role in driving
change throughout the dairy chain. That said, the growth of
supermarkets is having a signicant and growing eect also
in Central Europe, not so much in terms of quality, but in

Table 7. Bulgaria: distribution channels of the interviewed dairy processors in 2003. Source: Authors calculations based on survey results.
Company name

Distribution channels
BG
supermarkets

FDI
supermarkets

Wholesalers

Own
shops

Other

Large-scale (>60 mio ltr.)

Serdika 90
Y (2000)
Markelli
Y
Danone
Y

N
Y
Y

Y
Y
Y

Y
N
N

Middle-scale (1560 mio ltr.)

Meggle
Y (2001)
Mlekimex
Y
Fama
Y (1995)
Iotovi
Y (1995)
Merone
Y

Y (2001)
Y
Y (1997)
N
N

Y (2001)
Y
Y
Y (1999)
Y

Small-scale (<15 mio ltr.)

PRL
Y (2002)
Mandra Obnova
Y (2001)
Milky World
Y

Y (2003)
Y (2003)
N

Y
Y (1998)
Y

Export

Contracts with
supermarkets

HACCP
certied

EU

Other

N
N
N

N
Y
N

Y
Y
N

Y
Y
Y

Y (2003)
N
N

N
N
N
N
N

N
Y
N
N
N

Y
N
N
N
N

Y
Y
Y
Y
Y

Y
Y
Y
Y
Y

Y (2002)
Y (2002)
In process
Y (2001)

N
Y (1998)
N

N
N
N

N
N
N

N
N
N

Y
Y
N

In process
In process
N

FARMERS, VERTICAL COORDINATION, AND THE RESTRUCTURING OF DAIRY SUPPLY CHAINS

terms of price and other demands being imposed on the upstream companies.
Most of the contractual arrangements in the CEE dairy sector are between the processor and the farm. However, we also
found cases of much more complex forms of vertical coordination and contracting, such as triangular structures where processors and retailers work with banks via loan guarantee
programs, to reduce nancial constraints of suppliers. We
found examples of this in the dairy sector in many countries
(Table 4). Another example of a triangular structure is from
Nischnyj-Nowgorod in Russia where a dairy processor
(Wimm Bill Dann) and a dairy equipment seller (De Laval)
collaborate. Practically all dairy farmers in the area have to
modernize and upgrade their equipment and facilities, but
only a few have the nancial resources to do so. The program
allows dairy farms to lease milking equipment. They have to
cover about 2030% of the costs themselves and receive the
equipment based on a three to ve year leasing basis. The principal balance can be paid o by the farmers through delivering
the raw milk to one of the dairy processors owned by Wimm
Bill Dann. The main condition in order to take part in the program is the compliance with Wimm Bill Dann quality standards. The equipment is being delivered by De Laval. The
project costs are shared by WBD and De Laval.
Two other interesting models are from Romania (Van Berkum, 2006). First, Danone, an international food company,
has developed an extensive nance scheme for dairy farms,
including a triangular structure with input suppliers. But Danone goes further than most other companies as it takes collateral itself from farms for medium-term investments for which
it provides loans. Second, the Romanian dairy farmers association ISPA created a joint venture with a private milk processor ProMilch. ISPA, with the assistance of a Dutch fund,
provides loans to small farmers who want to invest in animals
and/or equipment. Farmers do not have to provide any collateral; the milk delivered is considered the collateral. Eligibility criteria for loans include that the farmer needs to have a
durable relation with ISPA, in practice this means a delivery
period of at least 6 months but preferably 1 year. ISPA personnel, who have close contacts with member farms, need to
conrm the eligibility. Trust and reliability are also important.
ISPA deals with the default risk by having a liability of both
the loan beneciary and the milk collection center sta who
guarantee the reliability of the loanee.
In such environments the best one can do is to create selfenforcing contracts by designing the terms of the contracts
such that nobody has an incentive to breach the contract
(Gow & Swinnen, 2001). This can be done by increasing the
costs of breaching the contract or by introducing exible terms
which reduce the chance of breach in case conditions change
unexpectedly. However, this is not a simple exercise. There
are many stories of enforcement failure; for example, where
farms diverted the pre-nanced inputs to other uses or where
processors failed to obtain sucient quality of raw materials
from their supplying farms, despite extension, training, and
support programs, as suppliers regularly sold produce to other
companies or traders.
Even in the successful cases it took considerable ne-tuning
of the contracts over time to make the contracts self-enforcing.
In addition, circumstances change so rapidly in transition that
contracts required continuous adjustments as the self-enforcing range itself changes. Creating the right conditions for successful and self-enforcing contracting, requires extensive
knowledge of the sector and of local conditions and an ability
to exibly adjust the contract terms to circumstances which
can change rapidly in transition. Institutional innovations to

1755

ensure supplies for processors or payments for input suppliers

also help to enforce contracts. Eectively, what companies do
is interlinking markets. The enforcement of the credit transaction (loan and repayment) occurs through the output market.
Yet, whether this is sucient as an enforcement mechanism
depends on a variety of factors, and, as the evidence shows,
it may not always be sucient.
Another potential problem with the vertical coordination
process is the possibility of rent extraction by the processor
or the retailer. The very rationale for the emergence of these
vertical coordination institutions may at the same time act
as a barrier to entry for other companies and may give the
dominant partner in a transaction additional leverage. If the
processing rm can set the terms of the contract such that it
captures most or all of the rents, the productivity growth
may not benet the farms. Moreover, if the interlinking of
transactions bestows additional monopoly power upon the
processing company, the farms income could not grow, despite the fact that total income has improved. 19
Hence, an important issue is how to combine eciency gains
with an equitable distribution of the benets in the chain.
Competition plays an important role in this process. Competition prevents companies from exercising monopoly power in
the design of the contract conditions and makes it more likely
that the farms share in the benets.
Empirical evidence on these issues is limited and one should
be careful with drawing conclusions. Preliminary evidence
from the dairy chains suggests that so far in CEE countries
both farms and processors benet from private-sector-induced
vertical coordination, and that there is substantial competition
among dairy processors. 20 The main reason is that the collapse of farm output and livestock numbers created a gap between processing capacity and supply, and hence excess
demand. There is even more excess demand for high/better
quality supplies because quality is low due to (a) a history of
poor quality in the system and (b) reduced access to inputs
and nance. This makes CEE a suppliers market and this,
in turn, supports the farms bargaining position vis-a`-vis the
processing sector in the distribution of supply chain rents. 21
Moreover, in cases where quality supplies are scarce and
non-trivial investment is required for quality upgrading, the
bargaining power of quality suppliers may increase substantially (post investment) vis-a`-vis the processor or trader. 22
These arguments are important both for the issue of exclusion
and for the rent distribution in the chain because it suggests
that the power relationship (and the rent distribution) is
endogenous in the development of supply chain integration.
However, if competition among suppliers increases, or if demand falls, pressure on processors may lead to a consolidation
of the supplier base. At this point there is no systematic evidence that this is happening in CEE. However, there is some
ad hoc information from the most advanced countries, which
suggests that this may be starting. Studies from other parts of
the world, in particular emerging markets in Latin America,
suggest that these pressures may be real and important
(Berdegue, Balsevich, Flores, & Reardon, 2005; Reardon &
Berdegue, 2002).
8. CONCLUDING COMMENTS
The transition process in CEE has caused a tremendous
restructuring of the dairy chains. Farms and companies were
privatized. In many countries this resulted in a fragmentation
of the dairy farms, with dairy now being produced on small
family farms.

1756

WORLD DEVELOPMENT

At the same time, the dairy sectors were confronted with

global markets and investments by foreign companies in processing and retailing. These investments and opening to international markets have introduced higher standards, leading, in
turn, to extensive vertical coordination in the dairy chain. The
evidence in this paper indicates that there have been large
gains in productivity and quality throughout the chain as a result, especially since the late 1990s.
In countries close to the European Union the restructuring
of the dairy chain was mostly driven by investments in dairy
processing, while in countries further from the European Union, and less advanced in transition, retail investments are
playing a more important role in driving change throughout
the dairy chain. Evidence based on surveys from Poland, Bulgaria and Albania suggests that the impact on small farms has
been positive so far; although one should be careful to extend
these ndings. First, the impact diers signicantly between
countries. The timing and extent of retail and processing
investment diers strongly, reecting country dierences in
economic reforms and government policies. Also, while
in many Eastern European countries small farms dominate,
in others dairy output is still mostly produced by large corporate farms.
Second, the impact of vertical coordination is likely to be a
continuation of the important chain restructuring which
started 15 years ago. Besides privatization, this included a
massive outow of labor. In countries, such as Estonia, Hungary, the Czech Republic and Slovakia, more than 50% of
(ocially registered) workers left agriculture early on in transition. 23 This process continued as investments in the food
industry and the need to enhance the international competitiveness of the domestic farms have continued the pressure
for restructuring. In other countries this adjustment process
has been delayed by a variety of problems, but has started
since 2000 and a signicant reduction in agricultural employment will be necessary with economic growth, with or without
vertical coordination and supermarkets.

Third, the vertical coordination has positive eects by

addressing major weaknesses of the dairy farms. The sector
was (and in several countries still is) in need of nance for investments, technology and quality improvements, and access to
high-value markets. All of these factors weaken the competitiveness of supply chains. Investments by modern processing companies and vertical coordination with suppliers can play a
signicant role in addressing these weaknesses and improving
the global competitiveness of the supply chains. Moreover, instead of excluding small farms, private supplier assistance
schemes seem to reach many small farms which are left out of
government programs. For example, recent World Bank studies
on the Lithuanian and Slovakian dairy sectors show that small
farms do not get access to government programs or EU support
such as SAPARD. For them, the only source of credit and
nance is supplier credit from restructured dairy processors.
Fourth, modern retail and dairy company investments will
not only aect farms, but will have a wider impact on rural
development. This includes improved access to better quality
and a wider variety of foods and other products for rural
households, and the creation of o-farm employment, directly
or indirectly, in the supply chain. Investments in processing,
quality control and extension services are likely to create
new jobs in the rural areas; while at the same time the competition from the new chains will cause traditional shops and
processors to close. Modern retail and dairy companies, as
motors of market development, will also generate opportunities for dierentiation of products and value added.
In summary, these arguments suggest that modern supply
chains have the potential for important positive implications
for rural households in Eastern Europe, despite the challenges
that they pose. These investments may bring very signicant
benets to the region, but could also pose signicant threats
where inecient or undercapitalized farmers cannot make
the grade. It is important for policy to focus on the most
eective and appropriate methods for developing winwin
solutions for companies and farmers.

NOTES
1. Albania is an exception to this pattern, as the dramatic de-collectivization process there induced rapid growth in livestock output (see Cungu
& Swinnen, 1999).
2. See Blanchard (1999) and Konings and Walsh (1999) for a general
overview of the breakdown of the exchange system and contract
enforcement problems during transition.
3. Changes in payment practices can have a major impact at the farm
level. In 2001 the Dutch Friesland company bought a large Romanian
dairy, which utilized less than 50% of its capacity and had a bad
reputation with respect to paying its farmers. Without changing anything
but paying-in-time, Friesland succeeded in taking-in 2030% more milk
within a time period of 3 months. If farmers are convinced that a processor
is reliable in making its milk payments, producers are generally prepared
to deliver (more of) their milk (Van Berkum, 2006).
4. See Henson and Caswell (1999) for a discussion of the evolution of
food safety regulation in developed countries as well as the relationship
between private and public food safety controls and Henson and
Reardon (2005) for an overview of the evolution and nature of private
food quality and safety standards and their impact on agrifood supply
chains.

5. One can argue that EU regulations on food quality and safety are
driven indirectly by the food industry, and as such could therefore also be
seen although indirectly, as private food standards. The argument goes
that the EU food retail industrythrough organizations such as the
British Retail Consortium (BRC) and the International Committee of
Food Retail Chains (CIES)and in consultation with governments, have
driven most of the EU food safety regulations.
6. See Greif (1997), Gow and Swinnen (2001), Johnson, McMillan, and
Woodru (2002), McMillan and Woodru (1999) for evidence of the
important role of interrm relationships as an alternative to court
enforcement of contracts.
7. We will use the term assistance programs throughout the paper as
these programs enable farmers to upgrade their production and the quality
of their production. However, we do acknowledge that these programs are
used also as a competitive tool between processors and are therefore
designed to not only merit the farmers that use the programs but also to
benet the processor that establishes the programs.
8. Studies on credit constraints in developing and transition countries
point at the important role of interrm relationships as a channel of
nance, and in particular as a source of access to credit for poor

FARMERS, VERTICAL COORDINATION, AND THE RESTRUCTURING OF DAIRY SUPPLY CHAINS

households and small businesses. For example, in Africa large agribusiness
companies are often the only source of credit for poor rural households
selling their products to these companies (IFAD, 2003). Other studies
documenting the importance of trade credit in developing and transition
countries are Fafchamps (1997), Johnson et al. (2002) and McMillan and
Woodru (1999). Input suppliers, and processing and trading companies
can have a comparative advantage over traditional nancial institutions in
providing credit to small and poor households with whom they have a
business relationship, among other things because they are better able to
enforce and monitor loans (Petersen & Rajan, 1997).
9. It should be noted that in most cases the assistance programs are
available exclusively to larger farms in Bulgaria (see further).
10. Other countries which are also lagging behind in this process are
Romania and Azerbaijan (van Berkum, 2007; World Bank, 2005). Both
are characterized by a small-scale dairy farm sector and domination of
street sales of milk. In Romania, over 95% of all farms have one or two
cows and only 2025% of the milk is marketed. However, since 2000 there
have been major changes in Romania, where growing FDI has induced
important changes. Vertical coordination and contracting has developed
rapidly with FDI. Interviews show that the large dairy companies contract
with small and large farms and oer their farmers assistance programmes.
Improving milk quality and securing the milk supply base are the major
reasons behind oering these assistance programmes. Extension services
include support to farmers for making feeding plans for their herd, how to
increase milk quality, cleaning practices and also full business plans.
Several dairies provide pre-nanced inputs and medium-term investment
credits. However, most dairies oer these services only to larger farms.
11. The average age of those who stopped producing is 56 years,
compared to 45 years for the entire sample.
12. Interestingly, for those that expect to deal with less suppliers in the
future, this expectation is based mostly on choices made by farmers
themselves who may move out of small-scale agriculture and into more
rewarding activities either inside or outside the agricultural sector as the
economy is improving.
13. They dene small farm as having less than 5 cows (in dairy) or
operating less than 1 ha.
14. Van Berkum (2006) also nds in Romania that Friesland, and
especially ISPA and Raraul seem to be more inclined to work with small
farms than Danone, reected in the way they assist small suppliers and
invest in overcoming transaction costs. All of them contract many small
farms. Friesland has invested signicantly in collection centers. Raraul
and Promilch/ISPA take care of the collection and transport themselves.
ISPA, a dairy association, further provides basic farm support (feeding,
milk quality and hygiene).
15. See, for example, the 2005 World Bank report on Improving the
Investment Climate.

1757

16. Retail chains go through several steps in developing and upgrading

their supply chains, going from wholesale markets to preferred suppliers
schemes and moving to distribution centers and cross-border supply
systems. For example, one can distinguish two phases in the transformation of the CEE retail system, with dierent types of vertical relationships
with supplying farms: an (early) transition phase when privatization and
market liberalization took place; and a later globalization phase when
major investments in the retail sector by multinationals take place.
Countries such as Poland, the Czech Republic and Hungary are rst
wave countries in terms of retail transformation, starting the globalization period around 1996. Some Balkan countries such as Croatia,
Romania, and Bulgaria are part of a second wave, where retail
globalization started in the late 1990s. In a third wave of countries,
including Russia and Ukraine, retail globalization did not really start until
2002, but is growing very rapidly now (Dries et al., 2004).
17. There was another wave of investments in the late 1990s and 2000.
18. In Bulgaria, the rst major foreign investment in the dairy sector was
made by Danone in 1993. However, the rest of the dairy FDI came around
the same time as retail FDI. Foreign-owned supermarkets arrived in 1999
with Metro. It was followed by Austrian, Turkish, Greek and other
investments in the retail sector.
19. See Bardhan (1989) and Bell (1989) for an analysis of these equity
eects in developing countries in the framework of landlordtenant
transactions.
20. Rent extraction seems most problematic where governments are
directly or indirectly involved in restricting competition, as for example, in
some Central Asian cotton chains (Swinnen, 2006).
21. Codron, Bouhsina, Fort, Coudel, and Puech (2004) argue that in
Morocco and Turkey, where there is also a shortage of preferred suppliers
to retail chains, these suppliers have strong bargaining power (most of
them have more bargaining power than the retailer) because, rst, as
modern retailing of fresh fruits and vegetables (FFV) is still in its infancy,
there are only a few modern and large growershippers, and, second, with
a high price gap between exported produce and local produce, the cost of
contract termination for the suppliers is small since they can get the high
export price for their high quality products.
22. Studies on international FFV supply chains in East Africa also nd
that with increasing demand for traceability, the dependency relationship between suppliers and processors changes as processors/traders are
now more dependent on their suppliers. By working with fewer suppliers,
but with higher quality and traceability contracts, the suppliers become
more powerfuland tend to get higher prices.
23. The average annual decline in agricultural employment in the rst
wave countries Hungary, Czech Republic and Poland was 12% in 1989
92, 6% in 199397, and 4% in 19982001 (Swinnen, Dries, & Macours,
2005).

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