Professor, Jean Cordier

de niveau recherche, publiés ou non, émanant des établissements d'enseignement et de recherche français ou étrangers, des laboratoires publics ou privés.

Introduction

Farm-level agribusiness trade and services in EU is quite a large and very much diversified topic.

Depending upon the historical regional context, the type of input or output, farming and related businesses present quite a large diversity of organizations. In addition, a crucial change is launched within the European Union which has not been decided by politicians but by consumers.

This change is related to the full integration of the food chain. Consumers are now interested to know more and more on the technical practices of the upper side of the food chain. Agricultural market deregulation and new qualitative demands of the consumers are directly affecting farming and related businesses This paper is organized in three parts. The first part presents farming as an input-output system as any firm but with some specificities which influence the nature of the relation with suppliers and clients. The second part is an essay to represent the current mqst important types of organization of the agribusiness trade and services within the European Union. This part is based upon the search of the explicative parameters of such organizatiops. Finally, the third part will develop the parameters which should influence the future of such relationships and organizations and therefore have an influence on the future business climate in rural areas and in small rural towns.

I -Farming, a business activity with specificities Farming is a process of producing outputs, such as grains, oilseeds, sugar beets, fruits and vegetables or livestock and milk using a set of inputs. Traditional farm inputs are arable land, owned or leased, fixed investments such as buildings and long-term equipment including machinery, and direct inputs such as seeds, fertilizers and agro-chemicals. For livestock production, genetics, feed and veterinarian products are specific inputs. In addition to these inputs, labor and capital are traditional firm inputs. V/ith such technical inputs, the farm manager is supposed tô organize the various functions of the firm, in particular marketing, production and finance. Outputs and inputs are exchanged through various mechanisms and organizations, as a combination of < markets > and < hierarchies > in relation with various parameters (degree of differentiation, required services, access to the consumer, and others). For instance, grains may be sold on a cash market for immediate or delayed delivery with multiple potential buyers when machinery is bought to a specialized dealer representing a specific brand name.

But farms, especially family farms, do not manage directly all the traditional functions of the firms. For instance, the human resource management is very often minimized as farming is usually run by the owner with a limited number of employees. Labor is not considered as an input bought on the market against wages in family farms, but family labor find a return on the farm DOCtJl|/lEl'lTATOil ÉCOI'IOl\/lIE RURALE REl'lI,IES I ililt ilil| ililt ilIil llilt ilil ilil ilil *006255x I total profit. Then, the quality function is usually not managed as the farmer is doing < his best >. Farming has been considered up to now as a traditional activity with technolo-eical improvements through tirne. No real external audits have been performed on family farm to check for good production practices. There is no quality insurance system developed on farms, and usually farmers tend to react to external constraints such as public regulations or client constraints. In addition to the quality function, the management of environmental conditions has not been pracrically taken into account for the time being at the farm level. Finally, research and development are completely externalized and basically managed by large firms dealing with genetics and agro-chemicals or national research institutes. Family farms are acquiring technoiogy through various channels but are barely able to capture the associated economical rent which is kept by the technology owner.

In addition, farmers are buying services in order to manage the input-output farming system and improve the major functions of the farm-firm, For instance, farmers are buying accounting services, technical services, advice on labor regulations or social rights. The external expertise may come from private firms who are selling (or not) farm inputs or from farmer organizations, working groups on a pure independent basis or supported by public funds.

The farm manager has the responsibility of selling outputs and buying inputs, organizing the internal black box of the production process in order to fix a positive net margin. The following table gives an synthetic idea of the impoftance of various farm functions in the past and the prospective importance of those same functions in the future. 2,1. Some historical grounds to explain the agri-business trade and services within the EU Farming is a business activity within the food chain. The primary objective is to provide food and other raw materials to local and distant populations. Therefore, farming is a strategic activity, as it conveys the concept of nation food self-sufficiency. 'Wars and revolutions have been quite often related with agricultural production, deficits and more generally unbalanced markets. In addition, for some developing countries, agriculture is one of the most important resource for the national budget as agficultural exports account for a large part of the trade balance. For these reasons, agriculture is the source of national policies all around the world. The European Union is well- 2 known for its Common Agncultural Policy which influenced for more than thirty years the structure and organization of the farming sectoras well as its clients and suppliers.

Europe has a long history of nations, kingdoms, empires and repubiics. This region presents a -sreat diversity of social organizations, cultures and langua-ees. Therefore, European countries present various farm structures as well as different forms of agri-business trade and services related to farming. The farm inputs are bou-eht from suppliers and the outputs sold to clients with different types of contracts and relationships. In order to give a view of such types of organizations and their diversity, I think the only way is to come back to some historical features, In a rude and personal decision, history has been divided in three periods of completely different lengths. The first period starts very early in the past and lasts after World War tr, The second period is from the sixties to 1996. And the last period extends from 1996 ro now.

Period I covers most of the European history. During the period, two extreme positions can be represented with many intermediate situations. Some European countries have been stuck in quite liberal economies involved in international trade. Their fundamental culture brings the idea that the exchanges of goods, services and ideas are the source on national wealth. To bring some complexity to this view, countries had through time different attitudes. For instance, some cities were very much < market oriented >, like Venice or Genoa in Italy or the cities of the Hanseatic Guild in Germany.

Period 2 is the first phase of the creation of the European Union through the most important program, the Common Agricultural Policy. This period starts few years after the signature of the Treaty of Rome in 1958 when the major political instruments are implemented for various agricultural productions and ends in between 1992 and 1996. The major instruments are systematic purchasing public intervention for supporting European prices and isolation from international prices to maintain high domestic prices. These high prices were incentives to produce large quantities of agricultural products. As soon as early eighties, it is possible to have an evidence of a structural excess European supply for the most supported products. Therefore, in 1992, the Common Agricultural Policy Reform decreased quantitative incentives to produce and introduced new incentives for qualitative aspects. But the real shock to end this period came from the consumer through the BSE(t) crisis.

Period 3 starts basically in 1996 when consumers are disoriented by the sum of crisis and interrogations, hormones, BSE, antibiotics, GMO .., We know about the beginning of the period where consumers are much concerned by quality and also ethics of production, where consumers 3 I Bovine Spongiform Encephalitis are wondering on the potential and responsibility of science, and we do not know how long this new period will last. The last episode of the dioxin within feedstuffs in Belgium in June 1999 adds on the question of food safety and consumer confidence in production techniques.

As a consequence of period 1, we explain the large structure of the farm sector in the United Kingdom with the specific roie of the landlords in charge of maximizing the value of the agricultural assets or the intensive farm production in the Netherlands based upon high technological -erounds. Intensive livestock production based upon imported feedstuffs as well as high value added production in vegetables or flowers compensate for small farms and high land value. In the meantime, these countries developed the most transparent and liquid markets for agricultural products that exist in the European Union. These traditional markets concern futures markets in the United Kingdom and sophisticated auction markets in the Netherlands. A French region, Brittany, made a copy of these last markets for vegetables and hogs, with very positive consequences for the producers and the regional economy. In Latin countries, the cultural features brought a structure of small family farms with a low technology and a great inertia to adapt to the economical and technological environment.

As a consequence of period 2, we would like to emphasize the great success of production development as the fundamental result of price incentives by the mean of technological use as well as various forms of organizations. All the sources of productivity were used : new genetics for improved seeds, larger machinery and more powered tractors, high use of fertilizers and agro- chemicals. The maximum of productivity was the economical optimum for the farmers. The question was also to buy the latest technology and to buy it at the least cost. The question of the demand is not so important at that time, as the political measures guarantee that what above the consumers demand, the excess supply will be taken by the public authority and << exported > on the international market with adequate subsidies. Therefore, one of the characteristics of the period is the dichotomy between the sphere of production and the one of consumption. This situation is illustrated by the following scheme.

The food chain

The consumer has a traditional demand of good value and convenient foofl products that is fulfilled by the food and retailing industries. Commodities are bought from the < farm side > at administrated prices. The dynamics of the food chain comes from the confrontation of the arbitrage power of the growing retailing industry and the product power of the food industry based upon innovation and consumer marketing.

Farmers with administrated and rather fixed prices for agricultural products are looking for cost etïicient techniques in order to make profit. Margins are very tight for outpur marketing as the competition is high between private and cooperative organizations. The dynamics of the supply side comes from the input industry which brings technical innovation to farmers, usually through larger scale technology. Therefore, the rent is kept by the input suppliers and good margins are -ei ven to di stributors.

Current agribusiness trade organizations

With a determined target price of the agricultural products, the farmers focused on the production process in order to minimize costs. Productivity is the ultimate objective How the farmers managed to buy their inputs vary with the types of inputs, the market structure of the suppliers and also the < fundamentals > from period L Two extreme situations can be drawn with a range of intermediate which creates a real difficulty to present a synthetic view. The first situation is represented with the large farm able to have a good knowledge of the incoming technology and able to bargain the price of acquisition. In such situation, private suppliers are providing the major farm inputs. A private company works as a wholesaler for agro-chemicals, seeds, feed and else. The private supplier usually tries to present the largest number of inputs in order to maximize the retum from the farmer relationship. Some inputs are specific, especially machinery which requires repairing and maintenance work and banking for specific regulations of the financial markets (prudential rules). The private business is based upon a high initial education of farmers, a syrnmetry of information and therefore some equilibrium of bargaining power between the farmer and its supplier. We observe through time a simultaneous growth of size between the farms and their private suppliers. In addition to the purchase of inputs, the farmers are buying technical and managerial advice from private consulting firms.

The opposite situation is the organization of several farmers in order to reduce the market asymmetry of information and bargaining power. Agricultural history is full of examples of the continuing battle of the farmer against the abuses, either real or imaginary, of the marketing middleman, The farmer has continually complained about having to sell cheap as a producer and buy high as a consumer. Cooperative organization has been proposed by farmers as one possible solution to these problems. Cooperatives are businesses voluntarily owned and controlled by its members-patrons and operated for them on a nonprofit or cost basis.

Cooperative associations are established to perform certain tasks. When classified according to the tasks performed. cooperatives fall into four broad cate,gories, marketin,g, purchasin-e, service and processing associations.

Marketing cooperatives were first organized in order to sell farm outputs as commodities. Their role was to collect products from individual farms, grade and store them at competitive costs, then sell rhem on the markets to raders and industrial users usin-e agents and/or brokers. Most of the grain cooperatives in France started in such a way. The current cost effectiveness of such organization require a regular size increase, which is reaching now a million tons of grain per grain cooperative. When the agricultural product is unstable such as milk or when the product requires some initial processing such as slaughtering for livestock or packaging for eggs, fruits and vegetables, the cooperative of farmers enters usuaily into the first processing level. Large dairy and slaughtering-cutting-processing cooperatives exist in most European countries which compete with private businesses.

Very often and simultaneously, these groups o{ producers try to rationalize the purchasing of inputs such as seeds, agro-chemicals or veterinarian products. Through local producers organizations or even national cooperative organizations (UNCAA in France), farmers are looking for lower input prices and related technical services. Cooperatives are again competing with private business for distributing the production inputs. As explained above, margins and return on investments are much greater on technical inputs than on outputs, but these activities are linked and the same commercial person can deal with crop purchases and input sales, therefore large private and cooperative organizations are dealing with both activities.

Finally, producers are also organized for improving their technical and financial management. The technique is to develop groups of reference. On an anonymous basis, a group of thitty to forty farmers brings all their financial and technical data. In working together and with the help of specialists, farmers are able to analyze how the best farms are managed and how the less efficient farms should improve their techniques. These systems exist in most of the countries within the European Union.

But all these current organizations have been developed within the particular context of the "great" European Agricultural Policy. The food chain value creation is in two parts which are not much working together, the demand side with innovation through food products and new distribution techniques and the supply side with technical inputs innovations for a better farm productivity (grains and livestock). From the farmer point of view, the problem is not to sell but to decrease production costs with the adequate technique and inputs.

Within this scheme, a minority of farmers in all EU countries are not pleased with the increasing distance with the consumers. They feel there is a market segment for agricultural products coming from much more traditional techniques, without use of processed fertilizers, pesticides and other chemical products. These products are called < bio > as they catch the attributes of nature and tradition. In period 2, these products and their producers are marginal. The farmers develop direct links with consumers as the food industry and associated retailing industry are not willing to fulfill this small segment of consumption demand. Short marketing channels are organized through direct sales from the farms or sales through the traditional small shops.

III -Perspectives for the agri-businçss trade 3.1. A new food chain environment Since the mid nineties, several fundamental factors are affecting the agrifood sector. Three of them are of major importance, (i) a consumer demand for new qualitative aspects such as food safety and (ii) technology developments, and particularly biotechnology, which brin-e pro,eress and economic potential development but also raise some objective and subjective risks, and finally and maybe as a consequence (iii) an agricultural market deregulation which affects the global supply side of the food chain, in particular the farmers.

The traditional qualitative characteristics of the food consumer demand are related to organoleptic taste, adequate value with respect to different consuming situations, convenient qualities in terms of purchasing activities, transportation, storage and cooking. The food industry has been working on these characteristics for decades (Periods 1 and 2), alone first then in relation with the retailing industry which took quite a large part of the rent created by such work.

Since the beginning of Period 3, new characteristics appeared and developed, they are related to food safety and ethics with respect to the environment and animal welfare. In Europe, the bovine spongiform encephalitis crisis in March 1996 was a shock for the beef sector but indirectly for the total food sector. The consumer was eager to know the origin of the products and also the different steps of agricultural as well as food processing. The implication of such new demand characteristics is great as the traditional food-retailing industries are unable to respond alone to the consumer demand.. The very first part of the food chain is now considered as a very important part of the food safety chain, farm suppliers input distributors, farms and first processing industry. Furthermore, the demand for durable agriculture and animal welfare is directly related to farming activities. The gravity center of responsibility of the food chain has then changed.

Technology developments are first related to biology. Genetically Modified Organisms are now part of our environment, even though European and North American countries have not the same point of view on benefits and costs (or risks) of such products. But this current mediatic issue is just hiding quite a lot of products related to farm production which all brings economical benefit somewhere in the food chain, usually in reducing production costs. In fact, production techniques are more widely open and choices have to be taken positively, not only by individual farmers but by the complete supply side of the food chain. The second technology of interest is related to transportation. Transportation services are now worldwide, not only for bulk but for individual parcel, with new services such as fast delivery or cold chain and finally at decreasing costs. New transportation techniques allow one region, one food industry to sell not only commodities in bulk but intermediate food products around the world, which is a chance for any region but also a challenge as its own production can be replaced by impons. Finally, the communication technology is crucial for the food chain, as it allows new possibility of trade between regions at all level, for commodities of course, but also for intermediate food products and local consumer products. Electronic trading is a way to present regional products to the world consumer ... Taking advantage of such technological aspects, firms are more and more internationalized. Some are relying on trade, import and export, some are developing a real international network of subsidiaries and financial alliances. The food industry first but now the retailing industry are running for internationalization, searching for market shares in large economical regions such as Europe, North America, South America or Asia. The concentration of the dovvnside of the food chain is a challenge for the upper (supply) side, Agricultural market deregulation finally affects all the regions around the world. Most of the countries around the world are smali countries and local agricultural policies affecting narional markets through quantities or prices are less and less sustainable. The technology developments in parallel with internationalization of food-retailing firms are globalizing markets. As a consequence, we found that < new )> agricultural policies around the world are looking for economical efficiency at the farm level and support the creation of < public goods >, in parlicular the environment. Finally, agricultural policies are more and more taking into account the consumer and citizen demands. To be short, the dichotomy of the supply and demand sides of the chain, as a characteristic of Period2, is dismantled in the new period. Period 3 represents the union of the food chain where the consumer demand will lead completely the work of the compiete chain.

implications for the farming and agribusiness trade in Europe

The challenge of a regional food chain in Period 3 is to develop the value creation, not only in minimizing costs (which still is necessary) but in developing answers to the demand of the international consumer. The local consumer is the considered as the closest international consumsr. The general answer to the new food chain environment is an adapted vertical chain management with improved intemal rules within each level of the chain and also improved interfaces between them. Each member of the chain brings part of the consumer demand within a vertical coordination. The economic theory has developed concepts on transactions and market participant behavior which-are of great interest to build adapted contracts within the chain. When quality is cheap to analyze, products are usually €xchanged with minor interface between the seller and the buyer. Depending upon the unit cost, ex-ante information is checked and/or created either by the buyer, the seller or a third independent body. This is the traditional way for commodities including agricultural products, performed in Periods 1 and 2. These products are called search goods 12;. Vfhen the risk of the buyer is increasing and the cost of quality checking is high, quality may be checked after product delivery, and contracts usually include a,warranty sysrem with penalties for lower quality. The warranty will limit the risk of the buyer without being a safety-first criteria. When transactions are done on a regular basis, buyer and seller are developing a kind of < implicit quality information >. These products are called experiment goods. Finally, the models on transaction with limited ex-ante or ex post information, high transaction risk are developed in industrial economics with the concept of credence goods. On such basis, the concept of .< seller reputation > becomes crucial.

It is possible to consider that the food product is now shifting from the status of experiment good to the new slalyf-, of credence good. The intemational consumer does not trust anymore the food firm but is looking for food chain quality insurance. He is now asking the retailing industry to select such food chains around the world. This is a complete new approach which affects not only the food firms but also their suppliers, the farm sector and its own supplier of inputs.

The two direct basic implications of such moves are the need for vertical coordination (including production ri-ehts; and the need of new income risk mana_sement techniques.

The objective of vertical coordination is to increase the food chain value in bringing all the quality attributes expected by the consumer. In other words, it is a mean to add ethic and food safety value within food products. The consequences are a better rent to be shared between the chain members, therefore a better expected price for farmers and the insurance to sell their products. That is what is sometimes called the < production rights >, The techniques of vertical coordination for the upper part of the food chain, farming and related agribusiness trade and services, include the fine analysis of the consumer demand and derived demands from the food industry, the writing of contracts with direct suppliers and clients describing all the product specifications and production method description. And the implementation of quality- environment-ethics insurance schemes for each chain participant, This vertical coordination requires very often an horizontal coordination between firms from the same origin in order to take advantage of volume effects, reduce unit fixed costs and share local specialists. Such specialists may come from firms in other industrial sectors. Finally, we observe the development of a complex set of vertical and horizontal relationships, which brings the idea of a < network company > for representing the upper side of the food chain.

The concept of new income risk management comes from market deregulation for European Union farmers and other market participants. Farmers will produce more and more for definite and specified consumer market segments in terms of quantities and qualities but they will face price risk as well as yield risk, inducing a global income risk. Therefore, there is an increasing need for market-based risk-management instrument for various time horizons, shofi term which corresponds to crop year for instance, intermediate tern, from three to five years, which corresponds to some asset depreciation length and also long term, from five to twenty years, for long term investments. These techniques are based upon the use of derivatives contracts, swaps and long term insurance contracts. The objectives of such contracts are quite similar for the different objective terms, like defining floor income (or price), tunnels with minimum and maximum prices or participation contracts with minimum prices in case bearish markets and gain sharing in case of bullish markets. Current techniques in EU consist in presenting such programs and related costs as a << normal > variable cost of production as the use of pesticides or herbicides. For instance, for wheat production, fertilizers cost can be 7-8 7o of the sale per hectare, pesticides 7 -8 7o and a put option for a minimum safety price about 2-3 Vo.

Farmers will both participate to vertical coordination for fixing < production rights > but simultaneously will enter into risk management contracts to bring flexibility into their marketing plans.

These new marketing conditions, upward and downward, for farmers described for Period 3, the culrent period, are already affecting both the farmer suppliers and distributors as well as the commodity traders and first processing industry.

The two main consequences for the agribusiness trade and services are first the need to organize themselves for new marketing techniques and second to help the farmers to better take into account some functions, such as quality and environment. New marketing and production techniques include : < Client Profiler > -Better knowledge of final consumers -Knowledge of international regulation -Knowledge of direct and indirect clients (concentration) 0 purchasing center (organization, methods) 0 logistics (adapted to each client) 0 business-to-business marketing (co-production of a system, key account management).

as opposed to consumer marketing (test marketing) 0 ability to work with international clients (intercultural relationships, distant working) " Image Designer > -Build a rent on the origin characteristics -Build an image on integrated quality insurance scheme (quality charts, quality management, new communication means and techniques) -Set a mechanism to share the created rent with partners (in particular farmers)

It is possible to elaborate on each title of the list but one very recent example may illustrate most of the concepts. It is the case of a dairy industry in Brittany in France which is dealing with cheese as ingredient for the food industry (pizzas, cold and hot sandwiches, fresh products, etc.). This region is not very much known for < traditional > products and it is well known that butter and milk powder are now commodities with no rent for the dairy industry. Therefore, the strategic idea has been some years ago to invest on increasing consumer segments and deal with specialized cheese products for various types of industrial use. Competition is high between various European firms and the market is at least the Common Market. But in addition, this firm has developed with milk producers and their suppliers strong quality insurance scheme with a complete tracability system for milk and processed products. All the feeding system as well as the veterinarian products are under this scheme, allowing some products and some constraints for their use. This is for pure production technique. Farmers are under a new environmental program which is supposed to limit the pollution problem (nitrates) in the region. During the dioxin crisis in June L999, the firm has been able to prove that the all producing system, from the feed to the cheese, was under control first to the consumer but also to industrial buyers of intermediate food products, It is possible to believe that trust into the supply side of the food chain is very important for the dernand side. It is a strategic problem for agricultural regions, for the local farmers but also the agribusiness trade and services, to be successful in such practices.

3.3.Local consequences for rural areas and small towns

Considering the new food chain environment, it is not possible to define a pre-determined model for the future of agribusiness trade and services, but changes should occur in the near future under well defined constraints. First of all, value creation will quite different from a region to another depending upon their competitive advantage. For instance, a region of low mountain will not be able to compete in terms of production costs, even with some compensatory amounts paid by agricultural pro-erams. The farmers and the first processing industry should try to develop the << renl of ori-ein ". Typical and/or traditional products have to be developed, designed in a new manner, and distributed first through direct channels, from the farm to the consumer, throu_qh traditional channels of specialized stores, through specialized shelves of the << modern > distribution or now through innovative channels (electronic sales). Another region with cost advantages will build on international products with high volumes of production. Horvever, these products will be developed within the new context as explained previously.

The model of or-ganization and behavior of the private agribusiness private and cooperative firms in Europe will differ from a region to another depending upon the mechanism of value creation and not the mechanisms of rent distribution between the participants of the food chain supply side. But individual changes may be expected in the various activities of agribusiness trade with respect to the previous analysis which should affect the economical activity of rural areas and small towns. The following (l) Farm machinery dealer. Changes will occur with the increasing size of farms, inducing less and bigger machinery. Technology also will affect such input dealer, like precision farming, with more computers, use of GPS connected with automated farm tools. Another change in western European countries will come with pooling techniques of machinery in order to reduce fixed investments and depreciation costs. Some farmers are reducing drastically their machinery and rent << farm activities > to specialized dealers.

(2) Fertilizers. agro-chemicals and seeds private business and cooperatives. Changes will occur in the optimization of the agro-chemical use rather than < maximization >. Much more sophisticated techniques will be used for rational use of fertilizers, pesticides, herbicides and other products. Therefore, products will be sold with more technical services in relation with client charts and contracts. Concentration will affect such or-eanizations for decreasing operating costs and dealing wi th increasingl y sophi sti cated nati onal and internati onal regulations.

New services may be shared with specialized firms on how to capture the rent for << nature >>, environment, quality, ethics. Agricultural official programs will brings compensation for durable agriculture and private dealers as well as cooperatives wiil develop plans for the farmers to catch such types of subsidies. Then, farmers will integrate such values and manage new traditional firm functions.

(3) Banks and Insurance. These financial institutions will have to understand all the new risks of the farming activity. They will develop new products to deal with such risks, going from short financing means of marketing contracts (futures contracts, options) to longer term financing of swaps or insurance schemes. Specialized division of banks and insurance will be devoted to such activities.

(4) Chamber of Agriculture and/or Chamber of Commerce. These traditional organizations will have to develop new regional services and new services. Regional projects can mature within these institutions, but also quite a lot of problems of transition in agriculture can be discussed.

Land market and farm structure may be regulated through ad hoc commissions in order to maintain a real land market but also take into consideration long term objectives for the agricultural region.

(5) Accounting and Management. Up to now, such services were related to production cost control. Their future is in margin management on short and long term. Their advice will integrate new commercial contracts, new risk management tools, new techniques of optimal farming. (6) New services. What can change for rural areas and small towns is the development of new services, basic services for quality management, but also firm organization, information services (market data but also specialized professional news magazines) and related techniques, tax specialists, and do on. The list of such services could be very long and in various EU countries, such services are practically in development. (7) Output private trading and cooperatives. These firms have a tremendous work for providing markets to farmers. < Production rights > depend on their ability to catch final and intermediate markets. Very often, supplying inputs and selling outputs are within the same business, allowing integrated plans for bringing all the quality attributes required by the market segments. In addition, this type of agribusiness is providing most of the risk management contracts, the necessary market information (current spot and futures prices, balance sheets, trends and expectations), and sometimes the farm marketing plans.

Local horizontal alliances and network with other types of local industries for developing adequate new services or managing new regulative constraints will give local development opportunities. From diversified organizations, such business move to a series of vertically coordinated businesses. t2 (8) First processing industrv. This industry is involved in the same way than the private trading and cooperatives. Sometimes, the first processing industry has been developed from the private or cooperative business. This business is the interface with the food industry, but also indirectly with the retailing industry. All the requirements of the demand side have to be fulfilled, which is a problem of internal methods but also coordination with direct suppliers, traders and cooperatives, as weli as farmers. This requires an improved organization between the plants and the suppliers, computerized communication systems and quality controls.

As a conclusion, it is reasonable to consider that farming will be more and more integrated into organized food chain, a chain of firms, The a-eribusiness trade and services which were targeting very quantitative aspects for farmers are already moving towards more qualitative topics. The main idea is to create positive value for the consumer in addition to productivity and cost minimization. This is finally a much more complex challenge than few years ago. A challenge but also a great opportunity for the sector. Traditional competitive advantages may change with new values of different consumer segments at the international level.

Organizations from the past are obsolete in many ways. They have to be designed in a new way. But, as markets are now involved, the timing of such new organizations is important.

Images, market products are the results of a long time process and worldwide competition develop every day the costs of being the << fournisseur du client-roi >.

-oOOo- Impacr of FDI on Farming and Agroindustry in the Restructuring of CEECs' Food and Agriculture Mr. Hamish Gow, Kàtholieke (Jniversity Leuven and Comell Universiry

Presentations of Individual Country Experiences TAB 5. . The Evolving Farm Structure in East Germany M r' U lri ch K o,, t,,, Chri sti an -Alb r e cht s. U niv e r s it aet Ki eI TAB 6.

  of the agri-business trade and services

  EU Accession workshop in the Rural sector Structural Change in the Farming Sectors of Central and Eastern Europe: Lessons and Implications for EU Accession SnsStON 1: EvOr,vINc Fenu SrnuCrunrs IN TIIE CEECs n Lrcur or POTBNTTII EU ACCNSSTON AND FARM CONNPBTTUVENESS TAB 1 .. Status of Land Reform and Farm Restructuring in the CEECs: A Regional Overview Mr. Zvi Lerman, DECRG, The WorldBank TAB2.MajorFeaturesoftheNewFarmingStructuresinthecEECs:Resultsof Ongoing SurveY TVork Mr' Joian Swinnen, DG II, European Commission TAB 3. Potential Competitiveness of CEEC Farming Under EU Conditions Mr. Klaus Frohberg, IAMO/IIaI\e TAB 4.

  Therefore, competition on markets is the most useful process even though the weakest market participants disappear at a high rate and that firms are rapidly expanding in size. The leaders of such European group would be the United Kingdom and the Netherlands. Some countries have a much more mercantilist economical approach. For them, wealth of nations is based more on the accumulation of gold and valuable goods. It is important to defend and support the national firms as family jewelry. Exports are then positive but imports develop suspicion of unfair competition. Protective political measures are required to << regulate > market problems. Latin countries and France in particular are leading this group.

  table presents which type of agribusiness trade should be affected and how. Agribusiness Trade & Services Intensity of change Types of change

	Input Distribution
	Farm machinery	Low	(1)
	Fertilizers, agro-chemicals, seeds	High	(2)
	Banks	Medium	(3)
	Services
	Chamber of Agriculture	High	(4)
	Accounting & Management	Medium	(5)
	New services	High	(6)
	Output Services
	Output private trading and
	commercial cooperatives	High	(7)
	First processing industry	High	(8)

  . Country Experiences in Adjustment of Farm Structures: Bulgaria Mr. Tom Morrison, Devec Limited TAB 7. . Country Experiences in Adjustment of Farm Structures: Czech Republic Mn Tomas Ratinger, RIAE Prague TAB 8. . Country Experiences in Adjustment of Farm Structures: Slovenia Mr. SteiPan Tanic, FAO SNSSTON 2: LINN LN,WS AND RELATED LEGAL INSTTTUNONS TO SUPPORT DNVBT,OPTvTENT OF LANO M,q.RKEIS AND FARM RNSTNUCTURING TAB 9. . The i.egai FramEwork for Land Ownership and Land Transactions: A Regional Overview Mr. Leonard Rolfts & Mr. Roy Prosterrnan, Rural Development lnstitute TAB 10Emerging Land Markets inCentral and Eastern Europe Mr. plter DaIe & Mr. Riclmrd Baldwin, University CoIIege London . Tadeusz Hunek, Potish Academy of Sciences TAB 16........ Romania M,.El,,oCarmenstefanescu,ScientificAssociationforRural Development SnsSION 3: F.q.RM SNNVTCNS TO SUPPORT IMPROVED COMPETITIVENESS or CEECs' Nnw FnnurNc Srnucrunns TAB 1 1..... ... Land Leasing and Related Registry Mr. James Riddell, FAO of Individual Country Experiences .,.summary of Four case Studies: Impact of Land Laws and Related Legal Institutions on the Development ofland Markets and Farm Restructuring in Lithuania, Hungary, Poland, and Romania .. . ,.. Evolving Commercial Farm Services for the New Farm Structure Mr. Oaitd Gisselquist, ECSSD, The World Bank ....... Farm-level Agribusiness Trade and Services in Selected EU Countries Mr. Jean corâier, Ecole Nationale supérieure Agronomique . . . . ... Improving Farm Competitiveness -Examples of Farmers controlled Buiiness in the North of Scotland, UK Mr. Simon Barry, Highland Grain Limited .......Bulgaria:SurveyÔfFarmers,Agribusinesses,TractorandCombine Owners Ms. Anna Georgieva, Agra AnalYtica ....... Extension, Research and Farm competitiveness in central and Eastern Europe Mr. keith Brent & Mr' Kalim Qamar, FAO Extension,Research,andFarmCompetitivenessinEstonia Mn OIav Kreen, FAO TAB 22 Second World Bank EU Accession \Morkshop in the Rural Sector Structural Change in the Farming Sectors of Central and Eastern Europe: Lessons and Implicatîons for EU Accession (-, Organized by the \ilorld Bank and tr'AO in Cooperation rvith the European Commission and the Ministry of Agriculture and Food Economy of Poland

	TAB L2
	TAB 13 ...... Lithuania
		Mr,sauliusCironl<a,LithuanianAgriculturalAdvisorySerllice
	TAB 14..	Hungary Mr. Endre Tanka, RIAE BudaPest
	TAB 15...	Poland
	TAB 17.
	TAB 18
	TAB 19.
	TAB 20
	TAB 21.
		June 26-291 1999
		Debe Center
		Warsaw, Poland

MrPresentations

Nelson P. ( 1970), < Information and Consumer Behaviour >, Journal of Political Economy, Vol. 78, p.

3ll-29


Nadine Heri{aiii

L E Ro

Yves Sumiy

Mil0t{al

Ll[ Ta

Arilrununrruu

Yves Surry
email: surry@roazhon.inra.fr

A BAYESIAN ANALYSIS OF TRADB IN PROCESSED FOOD PRODUCTS: AN APPLICATION TO FRANCE

Keywords: Agricultural trade, Product differentiation, France, Bayesian estirnation 1

The purpose of this paper is two-fold. First, it presents a trade model which extends the basic fumington specification by allowing for varying elasticities of substitution among sources of imports and domestic supplies. This differentiated product rnodel which is based on the use of a linearly homogenous "Constant Difference of Elasticities" (CDEH) ftrnctional form is applied to the French imports and home-produced consumption of nineteen processed food products. The second objective of this paper is to apply bayesian estimation procedures to fagricultural] trade modelling and to adapt them to the proposed trade rnodel. In particular, to overcome simultaneity bias, a linearized approximation of the CDEH rnodel is first proposed. Then, the application of bayesian estimation techniques and the use of Monte Carlo procedures with irnpor-tance sarnpling allows for the derivation of a postiori probabilities that conditions ori the stmcture of the estimated trade model (such as global validity of the underlying CDE functiori) are satisfred. Finally, the posterior distribution of the Allen elasticities of substitution among cornpeting supply sources are computed at the sarnple means point.

A BAYESIAN ANALYSIS OF TRADE IN PROCESSED FOOD PRODUCTS:

AN APPLICATION TO FRANCE 1 -Introduction Expansion in French total agricultural output over the last four decades has been accompanied by an equally, if not more, significant increase in France's trade for agri-food products. Thus, the volume of French agri-food exports increased more than six-fold between l96l and 1990 (Monceau, 1995).

France which was a net irnporter of food products in the sixties became a net exporter in 1970. This net exporting position in agri-food products was steadily consolidated over the 70's and 80's so that

France is now the second world exporter of agri-tbod products behind the USA and before Netherlands. Although French imports of agri-food products did not experience the same expansion as agri-food exports during the same period, they have steadily increased to reach in value terms 150 billion french francs in 1994, among which 2/3 represented import shipments of processed food products. Such a pattern is not surprising and is associated with a gradual integration of the EU agri- food sectors, and the development of intra-trade in this kind of products (de Frahan and Libert, ree6).

The objective of this paper is to explain the patterns of imports and home-produced supplies for processed agricultural products, using a differentiated product rnodel. For this purpose, we propose an extension of the Annington model based on an hornogenous, indirect and implicitly additive structure of consumer preferences from which dernand fbr irnported and home-produced products are derived. Its empirical irnplernentation is facilitated by the use of an homogenous 'Constant Difference of Elasticities' (CDE) functional form developed by Hanoch (1975). Relative to the Armington model, this proposed diflerentiated product model offers the advantage of computing varying elasticities of substitution among sources of irlpoft and domestic supplies.

When estirnated econometrically, the CDE firnctional form nrust satisfy certain conditions (in the form of inequality restrictions on its paranreters) to be globally or locally valid over its regularity domain. If conventional econometric estimation techniques were used, these conditions are not imposed and are usually tested "ex-post". On the other hand, in order to ensure that the estirnated parameters of the CDE function are globally or locally valid, constrained estirnation techniques similar to those developped by Shumway et al. (1990) fbr f'lexible functional forrns could have been applied. We did not follow this route in estirnating the CDE functions but rather opted for an alternative bayesian-like approach developed by Geweke (1989). Irrposing inequality constraints on parameters can be viewed as supplying prior infbrrnation before we proceed to the econometric estimation of the functional form with a data sample, and then to infer the posterior distribution of the parameters. Such an estimation strategy which has been employed recently by Chalfant et al. (1991), and Tifiin and Moxey (1992) for consumer demand and output supply systems derived from flexible functional forms has never been applied to agricultural trade rnodelling. It is our intent to fill in part this gap by adapting Geweke's procedure to the estirnation of hornogenous CDE import and home-produced demand functions for processed food products consumed in France.

-Conceptual and empirical models

The proposed differentiated product model framework retains two essential characteristics from the Armington specification. First, we distinguish commodities that are difi'erentiated by kind as "goods"

and "goods" that are differentiated by origin as "products". Second. rve assume that the utility function is homogenously and weakly separable. This proposed frarnework is however more general than the Armington model in the sense that we allow for imperfect substitution between various import and domestic sources of a given cornmodity. Moreover, we assume that imports and domestic production are viewed as final good supplies entering the decision process of the consumers.

Gven these assumptions, we define a direct, homogenously and weakly separable consumer preference structure where each good qi for I : 1,2,..,rt can be supplied by a set of rl geographically differentiated products r1l,s, from s: 1.2..... m. The products qi( can be ordered into a set of z separable and mutually-exclusive groups. The utility function corresponding to this separable structure is homogenously weakly separable and is defined as follows:

(f[q] : (l [vr(q,,,Çt2,...Çt,), t,z(c]r,,Ç::,...Qt,), ..., 1,,(Ç6,c1,.,.r,...11,,)J Il ] where v,(.) are viewed as homogenous sub-r-rtility hrnctions which depend upon a set of geographically differentiated products 11i". Linear homogeneity of the sub-utility functions also irnplies lhat q, = v, (.) . It is also possible to derive subgroup conditional dernands of the forrn, for all .r'belonging to group i: c1,,1 c1, --8,I P,,J .frn' .s -1.... tn ntrcl i = 1,... rr 12]

The optimization procedure behind the utility firnction [ ] rnay be viewecl as occuring in two stages.

The consumer determines first the product aggregates of each good I subiect to an income constraint and then allocates them among competing suppliers. Because the utility function is hornogenously separable, we can defïne agregate price indices pi which depend upon each pr', through an explicit price function. In the Arrnington model, these price functions are represented by CES price aggregators of all import source prices.

The proposed differentiated product rnodel expresses these prices ftrnctions in an irnplicitly additive fashion through the use of a CDE functional fbnn. Hence implicit CDE price functions are defined and expressed as: where eachHi, is approximated by a CDE function, zr', is the product pricepr.,. normalized by the aggregate price of good r. In 13.1, B* is called the distribution pararneter. ôr., or d,is=I-b,, are the price parameters. d,r is also called the substitution parameter. The CDE price function is globally validif B,"t0,b,,1l,andeither4,<0forall .sor0.b,,.l forall s (Hanoch, 1975,p4ll). Weaker conditions can be obtained and consist of (i) one h,, r l and (ii) somê Blr and bi, being of different signs. By applying Roy's identity, we derive the CDE demands for various (import and domestic) supplies: The subscript I is now omitted for reasons of convenience.

Allen elasticities of substitution can be derived using the following expression ostd.,n o,-f ,ïr drôn a k=t 5' tsl where â", is the Kroenecker sign equal to I for.r : 1 and 0 elsewhere From expressions [4.] and [5.] it can be seen that the Arrrrington model characterized by a constant elasticity of substitution o can be derived by setting all the ô. equal to a constant 11. The elasticity of substition o is then equal to a= l-h .

The system of demand share equations formed by expression [4.] and with stochastic residuals pr" could be estirnated by an appropriate system estirnation technique sr,rch as iterative seemingly unrelated estimation (ITSUR) or maximurn lilkelihood (ML) approach, wlrich takes into account the adding up conditions associated with the budget shares ( J. ). However. due to the highly nonlinear structure of the CDE demand equations, it is probable that non convergent estimation solutions will occur. Furthermore, the existence of a right-hand side endogenor-rs variable implies a simultaneous estimation bias problem. One way to overcome the nonlinearity of the CDE demand equations is to linearize thern using a log-ratio form1. Tlren, iterative three stage least squares estirnation is applied to this new sytem of linearized CDE dernand equations. I This trausforuration whiclt was first sugges{ed b.t, Tlreil lo eslirnale nnrllinornial logit moclel ensures that the estimated shares are alwavs positive and snraller than orrc. Conseqrrerrll_1,. the uronotonicitv conditions are automatically satisfied. Front an ecouometric estiuratiou pcrspcclive. il nreaus that tlre slochastic residrnl l" follows a logistic distribution. The log ratio transforntation applied to the CDE deurand funcliions e.rpressed in quantities was suggested by Hanoch (1975. p. 412) and applied in urost econourctric applications ol'the CDE fuuctional fonn (see Gupta and Dar, 1984, for instance) As it will be explained later, the above estimation procedure is not feasible in this study because the bayesian estimation method that we are using requires all the explanatory variables in the CDE share equation system to be exogenous.As a result, we adopt a two-step approach to estimate the parameters of the CDE demand equations. First, the system of log-linearized CDE dernand equations is transformed in first differences. We approximate the rate of variation of the price aggregator pby a Stone's geometric price index of all import and dornestic sources. This transfonnation is justified through a total differentiation and a re-arrangement of the implicit CDE price function. To show this, let us differentiate expression [3.] and express dprp as a function of all its components, dprlpsThe rate of change dp/p is then given by: dp_ p B t ( !u)'' g "^\lr) dtrt, where dyly=(r/J,/5,)-(d5,,,15,,,):,1(.) designates the syrnbol "first-difference"; and t" is a vector of stochastic residuals which follows a multivariate normal distributiorr with zero means and a variance/covariance matrix I . Note that in expressing the CDE demand share equations in frrst difference, the parameters B, vanish and are not identifiable. The budget shares still appears in the right-hand side of [7.], which still implies the existence of a sirnultaneity bias. To overcome this, we assume that the weights in the Stone's price index are approximated by lagged budget shares2'3.

-Econometric im;rlementation

Given the proposed ernpirical rnodel, the objective is to obtain bayesian estimates of the parameters b, incorporating (global or local) validity conditions Bayesian estirlation consists of combining prior information (prior density functions) with sample infbrrnation (sarnple likelilrood function) to obtain a posterior density of the parameters. Prior inforrnation that can be usecl for the parameters can be either informative (based on existing data or knowledge of the phenornen under study by the 2 Eales and Urmevehr eurployed this procedure to creale lhe lgrcgate price inclex to estinlate AIDS demand share equatious for ureat. products.

3 It is also worth pointing that this trvo-stage esliuration of the CDEH dernand equatiorrs is sonrervhat silnilar in spirit to the estirnation procedure of the Linear Aplrroxinrate Alrnosl Ideal Denrand Syslenr (LA-AIDS) within rvhich the agregate trarxlog price index (comrnou to all AIDS share equatious are relrlaced bv a Stoue's price index. It differs from the LA-AIDS approach in the sense thât the CDE clenrarrcl equations are eNpresse(l irt first differences.

investigator) or non-infonnative or diffuse. In the former case, a prior density function can be well defined and incorporated into the bayesian approach. In the latter, diffi,rse priors are characterized by a flat density function approximated by a constant. In this study, we assume that prior information is diffi.rse, consisting of validity conditions irnposed on the LA-CDE rnodel. This means that in either cases -local or global validity conditiorrsathe vector of pararneters (ô) will satisfy the inequality constraints defined earlier. We also consider that this prior inforrnation on the parameters à is known with certainty, so that a prior density function can be defined by a single indicator function: .f (bb,) = p(h) r.@lù ie l wherey is the sample data set andl,(.) is the likelihood firnction based on observed data. As the prior density function is a simple (unitary) indicator function, the posterior probability distribution is no more than a truncated density function generated from the sarnple likelihood function in expression [9.]. A point estimate of the parameters É which does not violate the regularity conditions is then obtained by taking the mean of the posterior distibution over the the dornain 1), that iss:

E(b) = l,,u,,b .f (hlfldb llo l Expression [0.
] is the conceptual tool that serves to derive point estirnates of the parameter 11. Its implementation is only feasible in sirnple cases wlrere the number of parameters is scant (in general no more than three). Beyond this, it is impossible to integrate expression [l0.] analytically, and we must have recourse to Monte Carlo integration procedures.

3.1 Monte Carlo integration with importnnce sonrpling ' ':

At first glance, the rnost logical way to use Monte Carlo integration to approxirxate expression [10.]

is to draw a large number of randorn drawings fl'orn the posterior distribution and then take the sample means as a "proxy" for E(b). To find a posterior distribution of ô consistent with the (global or local) validity conditions, we would only retain the replications fbr which such conditions are satisifed and then compute the means of the paranreters ô. In so doing, these "restricted" means approximate the truncated posterior derrsity fi"rnction defined by expression [ 10.].

In cases where random numbers cannot be easily generated from the posterior distribution, it is possible to use Monte Carlo integration techniques with importance sampling. This alternative procedure involves drawing from a density function known as the importance function and then taking weighted averages across draws. Put more forrnally, consider g(ô) to be the importance function, from which random numbers are generated. Assume that the ô; is the ith random draw from g(b) and w,=.f (b,ll)lS(b,). Then, the weighted means can be shown to approximate the integral where .fR and gR are the truncated posterior density functions, à,*, is a draw of pararneter à for which the validity conditions hold, and n is the number of draws for which the validity conditions hold.

At the same time as the means is generated, it is possible to compute other relevant indicators. The first one is the probability that the validity conditions are satisfied. Another useful indicator is the variance (and then the standard deviation) of the llosterior distribution which is obtained by taking the estimated variance of the posterior distribution. The latter is cornputed taking into account the importance density function. Finally, to check whether the selected importance density function behaves well, the numerical standard error (n,ic) proposed by Geweke (1989) can be computed for the posterior estimates of the pararneters b. used for the indicators previously defined.

In our case of estimating the LA-CDEH, the rnethod of Monte Carlo integration with importance sampling is well justified because the posterior distribution of the paranleters ô has a complex forrn, thus hindering to generate a well behaved truncated density function through simulation. To show this, the results obtained by Zellnêr for a set of reglessiorr equations is applied to the pararneters à of the LA-CDEH. Assuming diffi-rse priors for ô ancl I , the resulting posterior clensity firnction for â is given by:

.f ('lY) nltl-T'' ï.121

whereocdenotes"isproportional to", T"isthenumberof observationsand Aisamatrix of sizem-I by m-I forrned by the following elements.

cr,, --le,(h1'c,(h)J where e,(à) is the vector of residuals for the ith CDEH equarion.

Although the above posterior density function is "unfarriliar", it is much easier to work with than the corresponding posterior probability distribution associated with an estirnable CDEH model expressed in levels. In this latter case, the CDE demand equations include a right hand side (RHS) endogenous variable (i.e. the price aggregator p) which should be accounted for. To incorporate this RHS variable in the bayesian estirnation of the parameters of the CDE rnodel specification expressed in level formwould haverequiredto undeftake afull systern analysis of the CDE model includingthe demand equations and the CDE implicit price function given by expression[3.]. This would have resulted in a highly nonlinear model structure frorn which it would have lreen irnpossible to generate a posterior distribution of the parameters.. Given this situation, we had side-stepped this simultaneity bias problem by exogenizingthe price aggregator and then by expressing the CDE demand functions in first difference fonn.

-Estintation strategy

To implement Monte Carlo integration with irnpor"tance sampling for the parameters of the LA-CDEH model, we follow closely tlre multi-step procedure proposed by Chalfant et al (1991). First the system of LA-CDEH dernand equations given by expression [7.] and estirnated by ITSUR estimation rnethod produces estimates 6 and its variance/covariance matrix V(b) Then, the random draws for the parameters à are generated with the irnpor-tance ty iirnction which is assumed to follow a multivariate Student-/ distribution. The randorr number generator used for the Êdistribution is based on random drawings frorn the multivariate nornral distribution which are then adjusted to the tdistribution using the various relationshilrs existing between the nornral. clii-squared and Student ldistributions. This procedure suggested by Van Diik and Kloek ( 1990) included several steps which are easily irnplementable. To exparrd tlre nurnber of drawings and also to improve convergence, antithetic replications are also obtained and included into the bayesian estimation procedure. Once the random drawings for the parameters b have been generated. the corresponding values of the posterior density functions âre colxpLrted. The ttrird step of the estirrration procedure consists of checking whether each replication satisfies the global or local validity conclitions. Then, the means and the variance of the posterior distributions ancl the assoicated probability distributions for which validity conditions hold are estirnated using expressior.rs Finally. n..ç.c. of the estirnated parameters 6are derived to check the accuracy ancl the stability of the econornetric results.

-Empirical results

The generalized Annington rnodel developed in the previous section is estirnated for import and home produced supplies of processed fbod products in France. For eaclr of the goocls considered, we distinguish three sources of competing supplies, (and thus two linearizecl CDE equations) namely imports frorn the Rest of the EU (.s:l) and fronr the Rest of the World (RoW) (.s-2) and consumption of home-produced products (s:3). A tirne trend is also incorporated to capture nonprice effect which implies that a constant term is incorporated in expression [7].

Data for all the dependent and explanatory variables are available on an arrnual basis over the period 1977-1994 and are all expressed in rate of variation. The rate of change for the Stone's geometric price index was computed using lagged budget shares. Nineteen processed food products were selected6 Bayesian estimates of the CDE parameters were obtained by applying Monte Carlo procedures with importance sampling to the selected processed food products and by generating 5 000 draws to which antithetic estimates were added. Consequently, the posterior distribution of the b parameters are based on 10000 replications. Under such conditions and in case that we rnust check whether an estimated CDE function is locally valid, it is irnpossible to check such a condition for all 10 000 replications and each data sample point. To overcome this problern. we test the local validity condition at the sarnple mean point by checking the serni definite negativity of the associated matrix of Allen elasticity of substitution.

Lack of space prevented us from reporting estirnates of the paranreters obtained using the conventional econometric approach. However. an inspection of these results led us to draw a certain number of conclusions. First, it was found that the estinrated CDE pararneters were in many cases outside the accepted range. Consequently, local and/or global validity conditions were satisfied for only nine out of nineteen processed food products. For the other food products, it was impossible to obtain well behaved CDE functions. Under such conditions, it is difTrcult, if not impossible, to measure accurately substitution relationships among irnpor-t and dornestic supplies of processed food products.

These difficulties encountered with the conventional estirnation techniques can be overcome using the bayesian procedure which imposes global or local validity conditions on the parameters in the form of priors. In addition, the fàct that we can associate posterior probabilities to these conditions is appealing, providing useful inforrnation on the structlrre ol consunrer preferences. Looking at the first column of Table l, we observe that the probability that the estirlated CDEH functions are 6 Data used to estimate the systenr of CDEH clenraucl eqrratious stcul frour lu'o relercncc sources. Inrport data by origin were obtained frour the French Cusfonrs trade dala base rvlrilc tlrc prices and qturrrtitl' consunted of honte-produced goods are aggregâtes from the French nalional accounls clevelopcd b1' the lnstilrrt Nalioual des Statistiques et des Etudes Economiques (INSEE). Before u'e proceeded rvith tlrc bat'esiart eslirttaliort. both data sorlrces had to be hamronized to geuerate comltarable price and quantitl' aggrcgirtcs ou the virriorrs srrppl-v sources of processed food products. To do so, we used the "NAP 600" level of the French Nalional Accouuls nontenclitlure (about 700 products) and matched it rvith the correspouding nonrenclalurc of the French Cuslonls dala tlasc. Tltcre are about -50 processed food products at the NAP 600 level but u,e only retain the ones for u'ltich eaclt of tlte tlrree ilttport and ltottte-produced supplies represellt at least l% ofthe total consttrtrpliort.

  ^1-'='i.o,n,(&l'' o' dp/p by expression [6] in the first-difference, log-linearized CDE equations yields the final estimable econometric model specification (which we designate LA-CDEH): d!'=b,dp' *b,,,%+(1t,,-/r,)(Ës,4!) +e -.fnr.s= 1,. ..rt-

  the region of the parameter space fbr which global or local validity conditions are satisfied. Then, through the Bayes rule, we obtain a posterior density function./(.) expressed as:

Table 1 :

 1 Econometric results

	Posterior probabilities	----Âllen elaCticities of substitution
	Posterior probabllity that validity conditions	Posterior probability lhat all Allen
	hold
	r{t

It should be retninded that there is no neecl lo worw aborrt nrouolonicit.v couclilions since they are built in the ernpirical CDEH specification.

It should be pointed out thât several estirnates of ô can be lbrurccl. clepencling ulrou tlrc investigator's objective frutction (seeChalfunt et al., 1991. p. 479). Lr our case. lhe aclopliorr of tlre nreans of tlre posterior distribution irnplicitly irnplies that the loss filnction is quadratic. Theu. tlre nrean of tlre lrosterior clistribulion for ô urinimizes the expected loss.

globally regular is quite small for all products except tliree (industrial milk by-products, brandies and wine aperitives). Turning to local validity conditions. results are better. Hence, we found that for eight products, the posterior probability that tliis condition holds is equal or higher than 2OYo while this probability is in the [0.]-0.2] range for seven products. Furtherrnore, it is worth pointing to note that all the standard errors of these posterior probabilities (not reported) are quite small in both cases where local and/or global validity conditions hold. This latter finding would seem to support that the estimates of the posterior probabilities are robust and reliable.

In a three products' consumer preference structure. it is well knorvrr that two possible cases of substituability/complernentarity take place: the first one occurs when all the three goods are substitutes (no complements) among themselves while the other situation concerns the existence of only one complementarity and two substitution relationships. Columns ( I ) and ( 2) of Table 1 report that, conditional upon the fact that local/global validity conditions hold, the estimated posterior probability that these two mutually exclusive situations occur. Looking first at the case of globally valid consumer structures, we observe a high probability (greater than 0.6) that all the competing import and domestic supply sources are substitutes to each otlier. On the other hand, a more varied picture takes place in cases where locally valid conditions of the CDEH firnctions hold. Hence, it is found that nine products, the posterior probability associated with the occurrence of the latter event is rather high, greater than 0.7.

An examination of the posterior Allen elasticities of substitution (computed at the sample means point) allows to refine the previous findings concerning the nature of the relationships between imports and home-produced supplies. Hence, it fbLrnd that for all the fbod products analyzed, complementarity takes place only betrveen irlports fi'orn the European Union and those originating from the Rest of the world. On the otlrer lrand, Allen elasticities are ahvays positive for all products but one (chocolate and confectioneny products) between clornestic ancl irnport sources.

-Concluding remarks

The objectives of this paper are two-fbld. First, we develolt an alternative product differentiation model which extends the Arrnington speciflcation. Second, we propose the use of bayesian estimation procedures to agricultural trade rnodellirrg. The application to this alternative rnodel to French data in processed food products yields results which are superic)r to those obtained with a conventional estirnation procedure. These econometric results are prelirninary and need to be further refined through additional experimerrts and irnprovenrents in the specification of the proposed trade model. Hence, the adoption of an hornogenous consunrer preference structure is too restrictive and should be relaxed towards more general non-horlrogenous structures. The use of Monte Carlo l0 integration with importance sampling is one procedure among a set of simulation methods to generate random numbers. There have been some recent applications of Monte Carlo method based on the use of Markov chains to econometric modelling (Gordon and Bélanger, 1996). We could perhaps employ this latter approach in estimating the trade rnodel developed in this paper. In order to improve the econometric performance of this trade rnodel, it would be appropriate to select other bayesian estimation procedures which are not necessarily based on the approxirnation of integrals of posterior distributions. In this vein, we are especially thinking of bayesian bootstrap analysis of systems of equations similar to the one proposed by Heckelei and Mittelharnrner (1996)


Dominique Vermerschi

of Quality and Safety of Frozen Food throughout

EunncrNc ETHIcAL coNcERNS IN EcoNoMrc DEVELopMENT

The reflection, already ancient indeed, concerning social and economic ethics has been stimulated continuation to the economic, social and political upheaval of the last decades : the Universal Declaration of Human Rights, the non sustainable economic growth and the mis- development of many countries, the development of the State-provided welfare... In the early nineties, the progress of democracy was combined with an accelerated globalisation of the market that prevailed upon national and political frontiers. Through an unbridled liberalism, the justice provided by the market appeared increasingly malthusian and undermined the framework of ethical social behaviour which has been patiently woven.

If tecirnological innovations have largely contributed to the improvement of life conditions, technical advances appear increasingly ambivalent to-day. Indeed, the new scientific knowledge dissipates the uncertainty but allows some technical applications leading to new risks and uncertainties : such is the case of the genetically modified organisms (GMO).

Generally speaking, the innovations in the agricultural and food sectors have largely reduced the natural conshaints, which at first glance looks like a certain connivance between technical progress and human freedom, each considered as the fruit of the other. In order to be save employment, job opportunities get scarce ; even if at the beginning, capital ownership insured a relative stability of the economic domination, technical advances now have as strong an influence as leaderships and market positions. Technological innovations are today a key-1AIRA, Unité Economie, Rue Adolphe Bobierre -CS 61103-35011 Rennes cédex. E-mail: dvermers@roazhon.inra.fr. D. Vermersch is also with the UCL (Louvpin la Neuve, Belgium) D6CU11ENTATp11 ÉC911S;14;E RUIIALE RE1111ES r ililt ililt ililt 1ilil llllr lllll llll llll ir( 0.0 4 7 0 1 * factor conceming competitiveness and commercial confrontation and sometimes annihilating traditional agricultural savings which had been patiently woven.

The ambiguity of technical advances can be seen to-day, particularly through the evolution of the relation between man and nature. < lV'hat criteria can we adopt towards nature ? Should nature be viewed simply as raw material for Promethean exploitation by humans, or as tlte larger womb of lfe in which ltumans live, move, and have their being, and whose rhythms and laws they must respect ? Is the dominant human stance towards nature to be extractive and manipulative or harmony-seeking ? l (Goulet,t997).

There seoms to be a large wide-spread to consider nature as a moral authority. Indeed today's liberal individualism with its claim for autonomy is held to be the outcome of the historical path leading to the emancipation of man from nature. However, technical advances lead to unprecedented situations in which traditional moral principles are no longer necessarily shared or at least necessitate the mediation of knowledge and reflection.

Ethical concerns in economics culminate today with the recent attribution of the 1998 Economics Nobel prize to Professor Amartya Sen. He has defined modem economic science as a science of ethics without ethics, thus freeing itself from an ethical reference which would be external. The reward comes from the fact that Sen advocates philosophical and moral principles capable of regulating the just autonomy of economics.

Ernrcs AND ECoNoMrcs : THE MAINSTREAMS

The same author (Sen, 1987) traces the cross relations between ethics and economics to the aristotelian tradition. For the Greek philosopher, < the study of economics, though related immediately to the pursuit of wealth, is at a deeper level linked up with other studies, involving the assessment and enhancement of more basic goals. Economics relates ultimately to the study of ethics l. The modem economic theory emphasizes the immediat concern and has developed a value-free < engineering ) approach which examines how to mobilize resources and people most efficiently and fashion the institutional arrangements best suited to the economic growth. The ethics-related tradition refers to ultimate ends and questions such as what may foster < the good of man > or ( how should one live >. As noted by Goulet (1997) these concerns are taken as fairly straightforward and the engineering approach has only to find the appropriate means to serye them.

However, Sen laments over the fact that the engineering approach also called positive economics < has not only shunned normative analysis in economics, it has also had the ffict of ignoring a variety of complex ethical considerations which affect actual human behaviour and which, from the point of view of the economists studying such behaviour, are primarily matters offact rather than of normative judgment >.

Modern approaches in ethics stem from the development of the political economic framework during the 18'r'century. Utilitarianism holds an original place ; the formalisation of contractual ethics is the main feature of today's developments.

Utilitarianism as a moral science of fficiency Initiated by Bentham 832) utilitarianism comes down to a very simple principle aiming at guiding all our individual and collective actions : that we must look for "the greatest welfare of the greatest number ". In other words to maximise the collective utility as the sum of individual welfares. This requires an assessment of the various political options on the individual welfare ; then the selection of the option that will maximise the aggregate utility. Utilitarianism stems from a teleological standpoint which subordinates the 'Just" to the "well".

As a "moral", utilitarianism imparts to the conscience the care of defining the idea of " well ", or more precisely the idea of " good ", that is to say what is going to provide to the reasonable individual satisfaction and welfare. It formalises in this way the ethical relativism (that every person determines and pursues his or her own conception of what is well). What interpretation and what social usefulness can we give then to a maximised and aggregated utility stemmed from various individual ethical options ?

Liberal ethics

In fact utilitarianism seems to be a rough "arithmetical moral". The instrumentalisation of the individuals to a collective objective would not be therefore systematically efficient from a social standpoint ; in addition it can undermine human rights. Such is the starting point of the liberal options in ethics. The liberterian version can be distinguished from other approaches integrating egalitarian concerns.

The libertarian version

It postulates that individuals have imprescriptible rights (especially property rights) ; the social institutions justifu themselves solely to enforce these property rights. Furthermore, no particular idea of the well has to be favoured or integrated in a collective objective to which individuals are bound.

More specifically, the libertarian ethics reduces the State at its minimal size. In such a system, how would the appropriation of the original goods be regulated ? First arrived, first served ? How would the property of public goods be managed ?

The rawlsian conception : justice as fairness

The attribution of the original property rights is integrated in the approach initiated by the philosopher John Rawls (a theory ofjustice, l97l). The author was interested in the notion of "procedural" justice, that is to say whether the social institutions are fair or unfair. Rawls imagines an original position of the human community in which it would be suggested to each of its members to look for and to agree upon principles of justice that would then unite them in real life. Given this fictive situation, the philosopher asserts that the members would agree on two principles ofjustice : First principle : every person has an equal right to the most extensive system of fundamental liberties to all that is compatible with the same system for others.

Second principle : economic and social inequalities have to be organised : a) in order to bring the best perspectives to the poorest people (difference principle) b) and so that they are related to functions and open positions to all, in accordance with the just equality opportunity clause.

There is an absolute priority of the first principle on the second because it concerns the fundamental rights of the person. The author proposes an ethical foundation to the social justice subordinating the well to the just (deontological option). Consequently, he challenges the utilitarian idea that would consent to sacrifice a minority of individuals in their fundamental rights in order to maximise the collective utility. Similarly, the difference principle, which shows the social and economic justice, is itself subordinated to the equality opportunity clause, What about the operational nature of the rawlsian theory of justice ? Although Rawls criticises the utilitarian economism which is continually used in cost benefit analysis, Rawls's theory requires a new constructivism. In other words, the faimess of the social and economic inequalities must be continually assessed for each member of the social group. Nevertheless this exercise ishazardous : the "fairness-productivity" of inequalities is strongly dependent on the evolution of the macroeconomic situation and remains conditioned by the subjective individual preferences,... A fair situation today can be considered as unfair tomorrow. Even if the principle is just and remains the same, its realisation is subject to the economic conditions. The political management of these inequalities is difficult to say the least.

As noted by Dupuy (1992), Rawls's theory is very unstable in its application and clearly plagiarises current representations of social justice operated by the cofirmon sense. Other ethical options with an egalitarian concern have been elaborated according to : the content of fundamental rights and the absolute necessity of granting them ; the criteria of distribution, the manner of taking into account the equity between nations and between generations... Each of them tries to conciliate solidarity and tolerance, namely : on the one hand an ethical relativism on the individual plan (implying notably the respect of the diversity of ideas of what a good life is coexisting in our pluralistic society) on the other hand a solicitude as regards the interests of every member of society.

SOME ILLUSTRATIONS AND INITIATIVES Ethical questions in agricultural andfood industries

European agriculture and its food industry have many faces. But they have in common a need to meet the challenges of sustainable growth and social integration and to cope with rapid changes in global markets: markets which will be fully demand-driven, strongly consumer-oriented and with the tendencies of openness and loss of trade barriers.

In most of the member states of the EU, the initial objectives of the Common Agricultural Policy (CAP) have been met. Those are for instance food security or the maintenance of a sufficient economic basis in rural regions. However the productivist technological in:rovation is strongly denounced today due to the fact of risks and uncertainties relative to the environment and the human health. Furthermore agricultural and food markets are more and more demand driven which provides incentives to take into account new social requirements. These cannot be fully marketable and take place in policy agenda also. Among the new challenges which have a clear ethical character :

The persistence of malnutrition in the world Consumer trust and industrial trustworthiness in the areas of food safety

The economy degraded by a lack ofjastice2

Every economic crisis must be analysed today within the framework of the free market. In each country, as in international relations, the free market may be an appropriate instrument for sharing resources and responding effectively to people's needs. Social justice makes trade permanent. Every human being has the right to accede to it, at the risk of foundering in an economic neo-Malthusianism based upon a stereotyped vision of solvency and efficiency.

Having said that, however, it must be noted that justice and the market are often analysed as two contradictory realities, which relieves the human person of any responsibility for social justice. The need for equity is then no longer the responsibility of the individual, who is resigned to succumbing to the market, but is transferred to the state, and more specifically to the Welfare State. In general terms, prevailing moral philosophies are largely responsible for a shift in thinking in this area. This shift has moved away from the field ofjust behaviour to the field ofjust structures and just procedures, a theoretical construction that is now out of our reach. Furthermore, this State-provided welfare, ad intra and ad extra, now seems to be running out of steam and to be increasingly less able to guarantee any genuine distributive justice, to the point of threatening the efficiency of the national economy. Should this not be cause to reflect on the relationship between the lack of an individual contribution to the establishment of social justice and of moderation in our o\ryn economic behaviour on the one hand, and on the other, the increasing ineffectiveness of existing re-distribution mechanisms that eventually diminishes the overall efficiency of our economy ?

To respond to this opposition between the market and justice, we can work on the basis of the notion of just price, derived from Scholasticism. This refers not only to the criterion of commutative justice, but more broadly to the criterion of social justice, namely, all the rights and duties of the human person. This realisation of social justice, thanks to a just price, is based on a twofold conformity: the conformity of the legal environment of the market to the "moral law" and the conformity of multiple individual economic acts which set market prices to the 'omoral law". Just as the market price is based on a variety of customary values agreed upon by consumers, so it is our moral conduct, as the arbiter of agreed customary 2 this sub section is part of the author's conhibution to a study done for Pontifical Council < Cor unum ) : World Hunger, a Challenge for all : Development in Solidarity. Libreria Editrice Vaticana, october 1996. values, that will cause the market price to converge or not to converge with the just price.

When market agents fail to incorporate their duty to ensure social justice into their economic decisions, the market mechanism itself will dissociate the competitive price from the just price. We are all invited to embody the moral law in our daily economic activities. From this stems the concept that the just or unjust character of the price is to a certain extent "in our own hands", the hands of the producer and the investor, the hands of the consumer and of the public policy-makers. All this does not dispense the State, nor the community of States, from the duty to exercise protection that is capable, among other things, of imperfectly making up for the lack of the individual duty to ensure social justice. This lack is the absence of conformity to the moral law, a duty incumbent on eachone of us. The common good is a political object which has primacy over the mere commutative justice in trade.

The Hoover Chair in Economic and Social Ethics Thanks to an endowment by the Hoover Foundation for the Development of the Catholic University of Louvain, the Hoover Chair in Economic and Social Ethics was created in 1991 to stimulate the explicit and rigorous discussion of ethical issues in the research and teaching of the Faculty of Economic, Social and Political Sciences, and to help nourish a clear and well informed public debate on the ethical issues that arise in the various areas covered by the disciplines represented in the Faculty. A newsletter is published twice ayeff and contains the programme of activities, a list of recent publications and information about various European initiatives in the arca of economic and social ethics. Since 1994, postdoctoral fellowships are awarded every year to enable foreign scholars active in the area of social and economic ethics to spend a number of months at the Hoover Chair. Since 1995, people with a university degree in any subject and students working towards such a degree are admissible to an undergraduate diploma in economic and social ethics (in French onlr. Since 1994, the Hoover Chair hosts the secretariat of a Europe-wide network of scholars and organizations actively interested in the idea of an unconditional basic income (or citizen's income or social dividend or demogrant).

CoNcl,ulrNccoMMENTs

As the year 2000 is drawing near, the Jubilee is a particularly necessary practice in the field of economy, for if left to itself, economy becomes drained of its life-blood, because it no longer does justice. Every economic crisis essentially appears as a crisis ofjustice which is no longer being carried out. The chosen people of the Old Testament had already understood this, and today it must be made a reality.

All men and women of goodwill can perceive the ethical issues that are at stake and are linked to the future of the world economy : combating hunger and malnutrition, contributing to food security and the endogenous agricultural development of the developing countries; developing these countries' export potential, and preserving the natural resources of planet-wide relevance. These are constituent components of the universal common good which must be identified and fostered by the developed countries. These components must also stand as the essential objective of international economic organisations and as the