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March 2, 2016

Asian Productivity Organization

Food Value Chain and


Development of Agriculture and
Food Industry
Osamu Saito
Professor at Graduate School of Horticulture,
Chiba University
Chairman of Food System Association of
Japan

Specificity from the perspective of


the food system
1. In innovation in four areas, roles have been changed due to change of the
relationship among entities constituting the food system, and "reorganization" occurs.
This will lead to the formation of new industries and the "fusion of existing industries."
2. The "reorganization" causes severe inter-system competition due to the maturation of
eating habits and shrinking of the market. The value chain which originates with
producers and extends to stores and consumers will become involved in price
competition. Although the share of the value chain differs depending on the industry
or business domain, a certain level of share is considered necessary.
3. If producers choose consolidation rather than alliance, income and employment will
be allocated to the farmer side. However, progress of food and food-related
companies integration into agriculture will allocate income and employment to the
company side.
4. Alliance with different industries (such as medical and welfare) includes the possibility
of formation of a new industry and is expected to lead to increased business. It is not
certain whether the simple easing of regulations will help create an opportunity for
large alliance.

Flow of the cost of food and beverages


according to final consumption
80.3
(100%)
For foodservice
business
1.4 [0.7]

For
processed
food
2.9[0.7]

Import of
fresh food

12.1

Increase by 33.8%

Import of primary
processed food
[0.5]

Food
manufacturer
30.7

Import of end
products
[1.9]
For direct
consumption
7.8[1.4]

[3.2]

Food-service
industry 23.7

Wholesale
market

Processed food wholesaler

Domestic
production

Farm
and
fishery
products
for food

Food retailer
(processed
food)
41.5

(Fresh food)
15.1

(Unit: trillion yen)


Amount of cost of food and beverages finally consumed

Food
service
23.7
(29.5%)

Processed
food
41.5
(51.7%)

Fresh
food
15.1
(18.8%)

[2000]

Increase
by
53.4%

Increase
by
42.6%

Decrease
by
2.5%

60.0
(100%)
Food
service
15.5
(25.7%)

Processed
food
29.1
(48.5%)

Fresh
food
15.5
(25.8%)

[1985]

Four innovations that link


agriculture with food
Combination of four innovations by innovating agriculture and rural areas
First innovation: shift to the sixth industry:
consolidation of processes from product management to processing and sales;
increase of added value, income and employment

Second innovation: growth through alliance:


innovation by combining different management resources, which is realized through
alliance with actual consumers (such as food-related business operators); and food
companies support for agriculture
Third innovation: creation of new value:
establishment of value chain extending to end consumers, and deepening of the
relationship among upstream (agriculture), midstream and downstream; how to
communicate the value of primary products; and agriculture
Fourth innovation: innovation in the region:
utilization of regional resources and increase in income, which is realized through
knowledge, value proposal and business innovation; and participation of many
business entities in the region

First innovation: Innovation of management by the


shift to the sixth industry and fostering of personnel
in charge
* "Consolidation" is different from "integration". "Integration" is a general concept which
involves strictness.
(1) Consolidation by large-scale agricultural production corporation induces excessive
diversification having low synergy effect and reduced profitability. Fostering of human
resources rather than the development of capital. Broad-based business expansion
rather than the fixation in a local community.
(2) Expanding the consolidation of family-operated and small-scale agricultural
production corporations will thicken the layer and could easily bring income to local
communities. Midstream and downstream businesses, such as hens for laying eggs,
tea cultivation, dairy husbandry, and tourist farms, will expand, integrate in the region,
and tend to form clusters.
(3) If direct sales stores expand from downstream business to processing business and
lead to the interchange with producers and the fostering of production corporations,
orientation to the shift to the sixth industry as a management entity is considered to
be enhanced.

Second innovation: Alliance of agriculture


and food-related companies
(1) Expansion of alliance: alliance among agriculture, food companies (midstream,
downstream), welfare and medical businesses; food companies entry into
agriculture; deepening of relationship
(2) Conditions for mutually increasing competitiveness: [1] improvement of product
quality, [2] increase in income or reduction of costs, [3] stable procurement and
supply, [4] price guarantee
(3) Support by food and food-related companies: increase of advantages of contractual
transaction: [1] large advantage of incentives, [2] conditions for partnership
(4) Comprehensive support by food and food-related companies: [1] leasing of materials
(such as seeds, nursery, and fertilizers) and harvest machines; field services; riskbearing including purchase of entire produced quantity and referral of clients
(5) Investment strategies of the agriculture side and the company side: [1] from OEM
(original equipment manufacturing) to investment relationship, [2] adjustment of
investment ratio, and roles of corporate managers

Third innovation: Formulation of


value chain (1)
1. The "value chain" means the effective linking of procurement, production,
processing, distribution and sales activities to create value with the aim of
securing competitive superiority which enables management entities to
generate profit. This activity chain dose not stay in one enterprise; and in
the case of food business operators, the chain needs to include activities of
producing and shipping raw materials and ingredients such as agricultural,
livestock, and fishery products which are implemented in production districts.
2. General rules of the value chain are that business entities ally with one
another, the agriculture side proposes values, and profit is generated by
utilizing those values in economic activities, and the profit is allocated to all
parties based on the partnership relation.
3. Requirements for forming the value chain are the established information
systems that enable traceability and GAP as well as established physical
distribution systems.

Third innovation: Formulation of


value chain (2)
(1) Establishment of regional brand by combining a "bundle of values"
(from trade-off to a bundle of safety, taste and functionality) and
brand value (image) formation of brand assets; and formation of
"invisible assets" such as environment, biodiversity, and water
(2) Intellectual property management: breeder's right, trademark right,
effective certification system, intellectual property management in
foreign countries, and unification with marketing
(3) Utilization of mass merchandisers and co-ops private brands (PB)
and positioning among brands in production district: establishment
of information systems in the farm field stage, organizing of
producers, and utilization of global GAP

Issues with the shift to the sixth


industry
1. How to increase competitiveness of agriculture business; how to get
over the expansion limitation of production management scale; shift
to the sixth industry and innovation of management
2. How to increase employment in the region and generate income;
how to effectively utilize regional resources and ally with local
communities and society
3. How to develop by transferring technology in cooperation with
enterprises, securing human resources, and utilizing network's
management resources
4. How to establish a chain that extends to consumers; establishment
of brand and development of effective sales channels

How Far the Agricultural Business Diversification and


Integration Can Be Promoted
1. Two policies: The industrial policy that covers entities such as corporations
and Japan Agricultural Cooperatives (JA), and the local community policy
that covers entities such as family farmers, starting up of business by women,
farmers' markets and nonprofit groups
2. What risk the integration of the production process with midstream and
downstream sectors will pose: Whether technical standards, the amount of
investment and barriers to entry have been improved, and how much room
remains to develop new strategies
3. How much value will be added, and whether the value chain can integrate
production, midstream and downstream processes and the consumption
stage
4. How to add regional flavor: the possibility of cooperation and clustering
between the same or different industries, and who should manage
operations

Important Factors to Grow Industries


in Promoting the Agricultural Business
Diversification and Integration
1. Changes in competitive environment and growth of large agricultural production
corporations Establishment of new business models, improvement in
competitiveness, industry policies promoted by agricultural production corporations and
agricultural cooperatives, and growth strategies for family farmers (converting farmers
into corporations is a necessary condition to manage employment and loans and to win
the confidence of business partners)
2.

Value added by family farmers and expansion of the value chain Extended family
(business succession involving two households, and promotion of starting up of
business by women - new roles of the daughter and wife)

3. Strategic horizontal diversification and vertical diversification (integration), excessive


diversification and synergy effects, the amount of investment, risks and management
abilities are necessary conditions to establish a business model for large agricultural
production corporations.
4. Enhancement of cooperation between local farmers and food and other related
companies could lead to the promotion of agricultural business diversification and
integration, the clustering of food industries, and the cooperation not only in a specific
industry but among different industries.

Characteristics of Each Sector, and


the Agricultural Business Diversification and Integration
1. Livestock industry
Hen eggs are easy to handle: They can be processed (to make custard pudding, chiffon cakes and other
sweets), directly sold or used as ingredients at restaurants (to serve tamago kake gohan rice with a raw
egg and other meals) at lower costs Growing hens has become popular among family farmers
A huge investment is necessary to build and manage facilities to treat and process meat, a wide variety of
products (beef, pork and chicken) have to be prepared at farmers' markets and restaurant managers are
essential.
In dairy farming, some restrictions are imposed on direct sales of milk in Japan. Challenges are how to
differentiate ones ice cream, gelati and cheese products from those of other producers and how to
improve their quality Roles of family farmers, especially female farmers who have established their own
companies
2. Horticulture
Direct sales of fruit and management of pick-your-own fruit farms Roles of family farmers, a large sales
channel
Fruit and vegetables can be processed into juice, jelly and pickles. Processing business operators are
typically small. But the business requires a huge investment, so farmers need to establish their own
corporations.
The vegetable processing business shifts from pickle making to frozen and precut products A huge
investment is necessary
3. Rice
"Mochi" rice cake, "senbei" rice cracker and precooked rice
Rice flour, bread, rice vermicelli and dumpling Become popular among family farmers, especially female
farmers who have established their own companies
4. Soybean
Soybean milk, tofu, tofu-related products and "natto" fermented soybeans
Frozen green soybeans A huge investment is necessary

Business diversification and


effective resource distribution
1. Whether to control profitability disparity among business sectors: [1]
independent accounting system, [2] shift to subsidiary, [3] capital
alliance, [4] contractual transaction, [5] adjustment between
profitable sectors and low-profitable sectors
2. Securing of human resources: [1] internal fostering of human
resources for operation and management, [2] headhunting of
personnel for planning and new sectors, [3] expansion of business
department or alliance with clients, [4] training system
3. Accumulation and transfer of knowledge for innovation: [1]
acceleration of launching new businesses, [2] possibility of
collaboration with clients

Restaurant value chain and its issues


1.

Increase in ability to attract customers and formation of value chain: [1] extension of staying time
and interchange with regional resources, [2] increase in average spending per customer

2.

Selection of set-menu-type or buffet-type restaurant: [1] a variety of menus and selection, [2]
diversified menu starting with vegetables, [3] increase in average spending per customer, from
700 - 800 yen to 1300 - 1800 yen

3.

Characteristics: [1] raw material expenses of around 40%, [2] cost reduction by utilizing direct
sales stores, [3] emphasis on lunch and cutback on dinner, [4] diversified menu starting with
vegetables, [5] menu consisting of 50 to 60 items instead of 100 items

4.

Roles of chef: [1] unnecessary chef for traditional menu, [2] development of menu by chef which is
different from the menu of direct sales stores, enrichment of menu by streamlining working hours,
[2] in-situ development of menu and creation of sweets, [3] necessary dietitian knowledge

5.

Comparison with seafood restaurant business: securing of fish species by using stationary nets
and cultivation, stable supply, proposal of fisherman dishes, securing of sufficient average
spending per customer

Matsuzaka Meat
Center

5 hog raising farms


(10 thousand hogs)

Management System of Mokumoku (Mie Pref.)


1/3

Yokkaichi
Meat Center
1/3

Co-op

Jusco and
other retailers

1/3

Iganosato Mokumoku
(agricultural producers
cooperative corporation)

Mokumoku
(limited liability
company)

(Inside theme parks)

Sales share
Margin
Profit

3%5%
Approx. 30%

51%
1530%
+

Supermarket

Specialty
store
Department
Store
Co-op

Directlymanaged store
(5 stores)

Stores in theme
parks
(11 stores)

Restaurant

Hands-on
seminar

Nature club

Direct mail focusing


on food and
agriculture

(Mail-order sale)

(Wholesalers)

(Kuwana, Yokkaichi, Matsuzaka, and Tsu)

12%
3040%

30%
A few percent

Source: P. 397 of "Innovation in Food System and Corporate Activities," edited by Osamu Saito, 1999

Current System of Mokumoku


Self-sufficiency of materials

Organization of
Mokumoku

Directly-managed farms
(allied agriculture)
Rice
Vegetables
Hothouse

Iganosato Co., Ltd.


Mokumoku Tezukuri Farm

Farms producing vegetables


Farms producing specially
cultivated rice
Dairy farms raising Jersey cows

15 ha
1 ha
1 ha

Fruits
Shiitake

1 ha
13,000

Creation of products
Ham Sausage Local beer
Local wheat bread
Japanese- and Western-style confection

Fostering of successors
Farms producing Gohichigo rice
Farms producing Iga vegetables
Farms producing vegetables
endemic to Mie Pref.

Creation of studio for


special products
Place to experience the fun
of agriculture

Agricultural park
Place to learn about food
and agriculture
Mokumoku Agricultural
Corporation Co., Ltd.

Mail-order sale and gift


sale

Independent distribution
system

Iganosato Co., Ltd.

Restaurant run by
agricultural farm

Place to taste products at


cost

<Inside the prefecture> Matsuzaka and Tsu Branches


<Outside the prefecture> JR Nagaoya, Rasshikku, Kusatsu, JR Osaka, and Abeno Branches

Agricultural Village Industry


Research Institute
Mokumoku-Ryu Co., Ltd.

Hahatoko Shokudo,
Co., Ltd.

Formation of alliance
among farmers

Subsidiary run by independent staff

Consulting on agricultural
village industry

Management System of Wagoen


Consumers

Wastes

Co-op, restaurant, ready-made


meal store, mass merchandiser, etc.

Wagoen
Headquarters

Saayas Kitchen
Freezing processing
center

Cut center

Perishable foods

Package center
(2 sites)
Collection of
goods

Members of
cooperative
association
(Producing
farms)
Compost and organic
fertilizer

Wastes

Recycle center

OTENTO (spin-off company)


3 retail stores
Overseas business section
(Thailand)
Fudo-Mura
(a "roadside station";
joint capital
organization)
Local producers and
processors

Source: Prepared according to the hearing research conducted in 2008

(Retailers)

Processing business

Processed products

Contracted farmers
producing fresh tea
leaves (35 farmers)
Directly-managed
farm (2.4 ha)

Fresh tea leaves

Fresh tea leaves

Technical guidance

Source: Prepared according to the hearing research in 2005


23 directly-managed
stores (annual sales of
600 million yen)

Crude tea

Other distribution
channel (annual
sales of
400 million yen)

Manufacture of finished tea

Manufacture of crude tea

Integration of Production, Processing and


Sales Processes in Sayama Tea Farm "A"
Local crude tea
manufacturer

Development of dairy products and


shift to the sixth industry
(1) Product development steps: [1] ice cream (machinery investment of 5 to 7
million yen, addition of one person in charge, several million yen to hundred
million yen) [2] gelato (training in Italy, which is the country of origin,
utilization of diversified resources, up to 5 hundred million yen) [3]
drinking yogurt (fermented twice) of Kisuki Nyugyo (Shimane) and organic
pasture grass (30 ha) [4] joint sales organization (LLP) with Tokachi
(Hokkaido) cheese (half of them are producers including those who became
self-employed from office workers) [5] Handa Nojo (Tokachi) cheese +
bread (wheat)
(2) Specificity of the production system: [1] shift of breed (Holstein + Jersey +
Brown Swiss), [2] securing of pasteurized milk production of roughage,
necessary grass field and rangeland, [3] improvement of hygiene control,
interchange with consumers

Alliance and support between food


business operators and agriculture
1. Supply of high-quality raw materials and ingredients on the agriculture side
and lack of management resources (technology, human resources, capital)
necessary support by food business operators
2. Active investment by allying with actual consumers on the agriculture side
purchase of entire produced quantity by enterprises, dispatch of human
resources, technical support, enterprises optimizing investments
3. Improved quality by contractual production and incentives, fostering of
large-scale producers increase in competitiveness of both food business
operators and producers
4. Food business operators technical support for producers: [1]
entrustment/consignment of machine operation, leasing of machines, [2]
materials (such as development of organic fertilizers and supply of seeds
and nursery), [3] field services, [4] purchase, and supply and demand
adjustment

Food industrys entry into agriculture


and directly-managed farm
1. Many food business operators that have entered into the business of agriculture inform consumers
about their social position as enterprises that have corporate social responsibility (CSR) standing at
the production point, rather than understand the establishment of directly-managed farm as a
business model.
2. The investment relationship is established as strategic alliance between producers and food
business operators, the investment ratio is adjusted, and decision-making at the executive board is
respected in agricultural production corporation.
3. Improvement of quality level including hygiene control has been targeted; however, there are
issues with the increase in investment amount and costs.
4. Unlike food-service companies, it is difficult for mass merchandisers and convenience stores to
thoroughly bear the risk of necessity of supply and demand adjustment, and directly-managed
farms have not yet been established as a business model.
5. Directly-managed farms should share roles with surrounding contract producers as well as assume
roles of technical guidance and employee training.
6. Winery (Domaine type) integrates farm and processing facilities, and products tend to be sold
directly or through mail order. Running a directly-managed farm helps increase product quality level.
Brewing (Japanese sake, wine, vinegar) creates "terroir," which is the taste of a local environment.

Food-service and home-delivery business value chain


Food System of Japan Nutritional Meal Supply Association Co., Ltd.
Producer
Directly-managed farm
Agricultural Production
corporation
Ikukun Farm Co., Ltd.

Contracted farmers
Nasu Kougen Organic
Farm, etc.

Wholesaler, retailer and


food processing plant
Logistics + wholesale +
direct sales from producers
Sanshii Service Co., Ltd.

Processing + delivery
Tark Co., Ltd.

Direct sales from producers


Kodawari Sanchoku

Japan Nutritional Meal


Supply Association Co., Ltd.
Registered dietitian

Dietary education and


community activities

Meal supply service


Hospital, care facility and school

Catering and home meal


delivery

Allotment of items
Directly-managed farm:
outdoor-grown vegetables, etc.
Contracted farm: organic and
specially cultivated vegetables,
and greenhouse-grown
vegetables

Consumers

Possibility of development of value chain


1. [1] progress of "visualization" from traceability, [2] development of
regional brand and private brand (PB), and [3] interchange among
consumers, production districts and producers, all from midstream in
production district to downstream and to consumers
2. Decrease in personnel (such as buyers) in charge of products fresh
from the farm in mass merchandisers, co-op, etc. enhancement
of proposal ability on the sales side progress of alliance and profit
distribution based on the partnership relation
3. Shift from supply chain to value chain by collaboration among
agriculture, commerce and industry and the shift to the sixth industry
4. Deepening of value chain in Asia by Japanese enterprises export
strategy and establishment of value chain in production districts

"Bundle of values" and proposal of value


1. Safety, taste and functionality (or health depending on food
business operators) are values that can easily be proposed by
the agriculture side. If those values are mutually combined,
synergy effect of a "bundle of values" can be expected.
2. However, even if safety level is increased, taste could
possibly deteriorate, or if functionality is increased, taste may
deteriorate. For example, food business operators maintain
high product quality by combining special cultivation with taste.
3. For fruits, taste has been highly emphasized than safety, and
safety has been emphasized for vegetables. However,
recently, functionality is intended to be emphasized for both
fruits and vegetables.

Brand rank regarding safety,


taste and functionality

Price level

Top brand
Organic JAS
Middle brand

Special cultivation etc.


Conventional cultivation

Regular

Safety

Taste, functionality

Safety and utilization of certification


system and GAP
1. Possibility of standardization of certification of organic JAS: [1] securing the
quality of inspectors, [2] price level and collective certification, [3] aiming to
decrease in the number of groups (specifically, prefecture), [4] issues with
certification quality, [5] determination of certification body according to the
relationship with client, [6] meaning of special cultivation
2. Selection of global GAP, JGAP, prefectural GAP and effects: [1] from safety
to emphasis on environment, [2] check items, [3] unification of specifications
from clients, [4] linkage with special cultivation and cultivation with reduced
agricultural chemicals, [5] whether third-party certification is necessary,
possibility of cost reduction, [5] possibility of display at stores etc.
3. Possibility of improved quality management by simultaneously utilizing
special cultivation and GAP

Ichidagaki (Nagano Prefecture) value


chain and integration
Agricultural cooperatives and horticultural
cooperatives (special agricultural cooperatives)

Agricultural cooperative (Kakinosato)

Agricultural cooperative (Plow)

Farm

Raw
persimmon
75~80 yen/kg

Dried
persimmon
1500~2500
yen/kg

Packed dried
persimmon
Addition of
material and
labor cost

Sales
3000~5000
yen/kg

"I" Nosan and "T" Sangyo

"K" Farm

"M" Sangyo

Direct sales store value chain and shift to


School- Meal supply
the sixth industry
meal
for nursery
program

Launch of new Shops-in-shop Mail-order


Condition of
sales
stores
Inside or outside the
region

location of stores
Alliance

homes

(Gift and consumer


delivery service)

Sales at stores
(for eating raw)

Deli
(sold at
stores)

Simplified processing
plan
(for sales at stores)

Restaurants Interchange with


consumers

Processing business

Collection of products
purchased from outside
Purchase from market
Nokyo-like network
Corporate and local network

Collection of products
Enriched lineup of fruits and vegetables, processed products,
rice, flowers and chicken eggs
Establishment of quality standard
Product development
Fostering of farmers taking the initiative

Producers (packers)

Assistance in processing
Fostering of
plants (both independent
producer corporation
and joint plants)

Direct sales stores and community business -Atarashiimura (Saitama Prefecture)


Investment
(51%)
Management
fee
Annual sales of
approx. 300 million
yen

Miyashirocho
"Foster
parent"
system
5 apprentices

Subsidiary

New Village Co., Ltd

Kosuke Co.,
Ltd
1.5 ha of
fields

Alliance

Commission
Farm interchange
business

Citizens farm

Sales and processing


business

Agricultural service
business

Approx. 80% of total sales


Agricultural
management

Direct sales stores


Local products
accounting for
80~90%

Agricultural
experience

21 ha of paddies and
4 ha of fields

Fostering of
successors
8 apprentices

Processing site

Approx. 4000
participants

Agricultural work service


provision business
8 ha of rice crop and 2.5 ha of
soba and soybean crop

Cafe

Rice and vegetable seedling


culture
Production of rice in 30
thousand pieces of rice fields

Handmade lecture

Shipping
Utilization

Commerce and
industry
operators

Consumers (residents, elementary schools, NPO, etc.)

Utilization

Agricultural farmers
Prepared based on hearing research

Concept and Strategy of Food Valley Tokachi


What is "food valley"?: platform formed to induce innovation
Concept intending to further develop wheat product industry gathered
in Tokachi region; advocated by Obihiro City and Obihiro University of
Agriculture and Veterinary Medicine
Product items range from wheat to potato, beans, dairy products, etc.
Related industries are expected to gather in the same region.
Three business policies to make the most of Tokachis advantages
To make agriculture, forestry and fisheries of Tokachi growth industries
To create values of foods
To disseminate the appeal of Tokachi

Materials
Wheat, potato,
beans, dairy
products, etc.

Technical
guidance

Processors
Yamamoto Tadanobu Store,
Masuya Store, etc.
R&D
Establishment of
strategy

Products
Bread, Chinese
noodle, gnocci,
cheese, etc.

Consumers

Producers

Image

Research
institutes/organizations
Obihiro University of Agriculture and
Veterinary Medicine, Tokachi Agricultural
Experiment Station, etc.

Tokachi region