Risks and Opportunities in International Logistics in the Agricultural Sector Supply Chains - Case Study Example

Complexities, Risks and Opportunities in International Logistics in the Agricultural Sector Supply Chains Student name Code + Course name Professor’s name University name City, State Date Executive Summary The paper looks at the existing complexities and risks in the international logistics in the agricultural sector supply chains, summarizing the main points of concern. Of the existing complexities, lack of services in the context of food logistics, which particularly affects the developing nations, is the main bottleneck. Lack of infrastructure and information, also results in reliance of the traditional ways of logistics, which cause much delay. The Purpose of the paper is to shed light on some of the less anticipated risks, such as geopolitics, advising stakeholders on how to avert the risk. Finally, readers should take note of the important sections, such as global opportunities in the agricultural sector supply chain to invest wisely. Introduction The agricultural sector has experienced tremendous increase in the flow of goods in the recent decades due to globalization. Changes have also been experiencing the varieties of goods, marketing and delivery systems, and seasonal availability of goods. These changes have also come with various logistics demands. There is therefore a need for an effective logistics system in the agricultural sector supply chain to ensure that the sector is able to keep up with the race of globalization. Logistics in the agriculture sector is important as it ensures a smooth supply of agricultural products and food from the producers to consumers. For the modern agricultural sector to meet the rising needs, the existence of a well-developed logistics industry, as well as a market system is necessary (Bosona, Gebresenbet, Nordmark & Ljungberg 2011, 178). The paper examines the logistical requirements in the agricultural sector and discusses complexities, risks, and opportunities the agricultural sector supply chains. Logistical Requirements in the Agricultural Sector Researchers have extensively researched and come up with a number of definitions of agricultural logistics. For instance, (Zhang and Li 2012, 637) states that agricultural logistics refer to the movement of material objects and interconnected information by use of physical means from producers to consumers to meet the needs of customers, on top of realizing the desired value of agricultural products. Most authors state that logistics in the sector of agriculture is an economic venture, which provides or ensures a continuous flow of products from producers to the final consumers. The aim of agriculture logistic is to enhance the production of agricultural goods, while taking into consideration the storage, transport, distribution, cost of production, among others to satisfy the customer. Factors, which affect logistics, fall into two categories, which are internal and external. External factors comprise technology, globalization, environmental concerns, and the workforce. The internal factors include supply chain management, third party networks, customer service and quality, and the changes in management and organizational style. Food companies should recognize the factors and have a strategy to mitigate issues, which may arise. The mitigation plan should maximize on performance, technology integration, and system structure. For instance, performance checks on better customer service, while system structure emphasizes on improved cross border organizational relationships. However, still, there exist logical complexities and risks. The existing Logistical Complexities in the Agricultural Sector There are three main complexities or challenges of logistics in the agricultural sector. They include infrastructural development and maintenance, especially in low-income countries, such as Africa, lack of services in the context of food logistics, and trade and transit facilitation. a. Infrastructural Development and Maintenance The third world faces daunting challenges in terms of infrastructural development and maintenance. This formidable complexity leads to higher spending or significant financial resources among consumers. Adverse weather patterns and lack of effective strategies to deal with flooding, causes roads and railways impassable. In other words, certain weather conditions break critical links of the supply chain; however, governments are building alternative corridors to counter the challenge. Recently, there has been a tremendous growth of infrastructure, particularly in the developing nations. This means, infrastructure is not the main issue in the supply chain, but the infrastructure to accommodate bulk food commodities is. For instance, a number of ports in third world nations lack the capacity to accommodate the growth of container trade (Ascher 2010), 66). Thus, there are delays, thus the efficiency of ports is also a major concern. One of the indispensable components of agricultural chains is storage infrastructure. Normally, harvest of foodstuffs occurs in a few days, while consumption takes some time, such as a year or above. This is to say, farmers cannot avoid storage, thus a chief source of concern during logistics. Some can ask why storage is a risk. The answer is that there are losses during storage. As well, the opportunity cost of tied-up capital is a risk. Some places, especially geographically dispersed regions, food prices shoot up as the distance or transportation increases. b. Lack of Services in the Context of Food Logistics In the agricultural sector, there exists complexity of the provision of services in the context of food logistics than any other industry. In particular, there is a risk of logistic services, especially for perishable agricultural products or commodities, which require a well-timed market delivery. Therefore, there is a high risk of losing product quality of agricultural products, such as fruits, cut flowers, vegetables, fish, and beef during breakdown in logistics. Moreover, in the developing nations, there is fragmentation of services, as compared to developed nations. As well, even recognized large public entities, which exclusively involve in the World Food Program or agricultural trade, depend on separate service providers during long distance corridor logistics. This means, there is still inefficiency of services and that, in some regions where there is segmentation of services, access of services becomes a challenge (Dicken 2014, 77). Economic centres of the corridors have quality distribution services as compared to rural area providers. Research has shown that traders and farmers in the third world nations face the risks of logistics, such as poor roads and high cost and unavailable trucking services. Importantly, underdeveloped communication infrastructure is the main cause of limited or untimely market information. In other terms, because there is a lack of services, in addition to information, then there is a high or total reliance on traditional ways of market information. Recent studies, particularly in India, exhibit that developed communication assist farmers to have better access to markets, intermediaries, and services. c. Trade and Transit Facilitation Agricultural logistics experience a series of same clearance procedures by border agencies and customs in the country of destination. This means, these procedures lead to delays and end up increasing transportation costs. As well, the delays may lead to food transporters renting, thus resulting to rent seeking behaviour. In comparison to non-food merchandise, trade in food items, such as grains is subject to extensive regulatory control. Some of the regulatory control measures include Health, SPS regulations, and licensing. It is important to recognize that there are large institutions, which organize imports and exports, thus limiting rigid interruptions along the supply chain. However, the complexity still exists for cross-border flows, especially among the smaller traders. These smaller traders try to grab the opportunity to trade food locally, but face a challenge of the unpredictability of clearance and harsh import behaviours, which create delays and losses even within short distances (Coulibaly 2012, 45). The Risks Experienced by Agricultural Sector Supply Chain The risks mostly relate to market volatility, geopolitics, and cross border issues. a. Market Volatility (Unpredictability) Market volatility in agriculture is of more concern because agricultural firms are losing or making substantial amounts of profits, which results from effective or non-effective risk management strategies. The last decade, 2000-2010, saw an increased degree of volatility in the world agricultural prices. For instance, in the European Union (EU), there has been a contemporary upsurge in the International Agricultural Commodity Prices, which in turn build up the deliberation intending to amend agricultural rules. Since the early 1990s, the European Common Agricultural Policy (CAP) has kept the EU’s agricultural prices at high levels. However, the CAP reforms of 1992 and 2003 eased the EU’s pressure, especially in international agricultural markets (Acharya, Kinnucan & Caudill 2011, 4759). The main characteristic of price volatility is unanticipated price changes. In this way, farmers react by cutting output supply, as well as stocks or investment in productive inputs. Moreover, there arise sourcing worries, which results from unanticipated price fluctuations in agricultural production inputs (Bolotova & Novakovic 2012, 380). In other terms, it means that market volatility in agricultural supply requires an understanding of the levels of the Food Chain. Therefore, to tackle market volatility issue, there is a need of a number of interventions at all levels of the agricultural supply chain. b. Geopolitics The start of this decade has witnessed deteriorating political situations in a number of countries in the Middle East. In 2013, the civil riots in Egypt were a major concern for those who rely on the Suez Canal for food transport. It is arguable that it is near to impossible for the closure of the arterial trade route, but it is wise to consider the possibility. Some may argue that there exist clear alternatives, such as the Cape of Good Hope, which means the closure of the Suez Canal cannot be a major setback for the agricultural logistics (Laruelle & Peyrouse 2013, 89). However, it is important to recognize that the European depend on the goods from Asia, the Indian Subcontinent, the Middle East, and Australia. Simply, this means that major businesses would be thrown into mayhem. It is evident that short disruptions can have substantial impact on agricultural logistics. Even though natural disasters account for most contemporary disruptions, the risk of geopolitics cannot be overlooked. For instance, the 2001 terrorism attack was the revelation of geopolitical risk in the supply chain. From the 2011 Arab Spring, it is evident that geopolitical risks are unexpected and can rise fast, with pervasive effects. Unsound political choices also lead to consequences, mostly, which affect innocent parties. However, to avert the risk of geopolitics, countries have to be informed in terms of laws, new regulations, and be aware of the new regimes (Souleimanov 2013, 55). c. Cross Border Issues There are many issues or risks of moving goods from one country to another. For instance, the issue of piracy in the Horn of Africa was a major risk, but the ongoing efforts of war against terrorism have ensured peace in the sea. However, the risk still exists. As well, there is a challenge in trying to harmonize laws and process to ensure a smooth flow of goods. Another factor hindering cross-border logistics is currency fluxes. For example, the U.S. to Canadian dollar has recently been on par, but the 2014 imbalance meant that the cost of trade and sales was high. The geography of a certain nation can also pose challenges, particularly for shippers. In particular, the border of Canada lies 100 miles of the U.S. border. Therefore, Canada stands to benefit because shippers are comfortable navigating the Canada than in the U.S. border (Anderson 2012, 234). In addition, companies providing logistic services between borders should have an understanding about regulations and compliance, which relate to transportation and cargo. To avoid cross border issues, companies need to adopt strategic actions to manage the flow of agricultural products across the borders. As noted, logistics of agriculture products across borders encompasses several steps and parties, as compared to domestic supply chain. This calls for automation of the steps in order to lessen transpiration costs and increase on-time deliveries (Anderson 2012, 156). The Global Opportunities in the Agricultural Sector Supply Chain The sector of Agricultural supply chain comes with a number of opportunities. The three, which stand out, include technological innovations, potential investors in agribusiness, and population and income growth. a. Technological Innovations There are four areas, where technology has been developed in the first world nations, but needs improvement in the less developed countries. These four areas include transportation, facilities, information, and inventory. Transportation is the movement of goods in the supply chain. There are opportunities for the development of boat, train, and truck routes in the less developed nations. There are also two main types of facilities, which are production and storage (distribution). There are major gaps in the area of facilities, especially in the developing nations. Developers can take this opportunity to invest in this needed technology. The level of inventory, which deals with product quality as well as enhancing product delivery, lags behind. Moreover, information technology, which will incorporate all the levels to ensure effective performance throughout the supply chain, is the main driver (Li 2009, 88). Finally, the adoption and development of agricultural biotechnology will enhance agricultural production, marketing, and trade, and still there are high expectations in the coming years. b. Potential Investors Globally, there is a huge demand for the investment in global marketing infrastructure. The United States is one of the developed nations, which has already embraced this opportunity. Other nations are in the process or in varying stages of developing their agricultural logistics in order to realize the opportunities. For instance, Russia needs the interior infrastructure, such as wagons, railways, and on-farm storage facilities. Recent research shows that there is an on-going investment, but there is still a need for more investment in agricultural infrastructure and production improvements in Russia. It includes billions of investment in farms, port infrastructure, construction of the railway stations, and an inland country elevator, among others (Jeffries 2011, 124). In Ukraine, there have been significant investments in agricultural production and infrastructure, but still the market is in need of smaller companies. Brazil has significantly expanded its production of corn and soybeans because of substantial investments in science and agricultural or Genetically-Modified (GM) crops. Currently, there is high demand for the agricultural industry to invest more in national logistics infrastructure to ensure a smooth movement of bulk commodities, both within and outside the borders. The existing state of agro-logistics in most developing nations is facing major bottlenecks, many of which require short-term investment. The critical areas for potential investors include facilitation of information to enhance decision-making and coming up with innovative solutions to ease infrastructure congestion, which is a logistical impediment. Other areas of investment relating to logistics comprise the development of rural transportation in order to improve access to markets and information technology to increase access to information. c. Income Growth The largest economic sector in Africa is agriculture, which represents more than 15 percent of the continent’s total Gross Domestic Production (GDP). However, underinvestment in Agriculture, specifically in the Sub-Saharan Africa is the main reason the region performs poorly in agriculture production. With improved investments, both from the private and public sectors, in addition to donors, there will be increased income. Investment in agriculture means that there is the right infrastructure, such as transportation, and thus framers will have access to markets, increasing their income. Conclusion and Recommendations The aim of the paper was to examine current logistical issues, such as complexities and risks, as well as logistical opportunities in the agricultural sector. Of the three existing complexities discussed, lack of services in the context of food logistics, which mostly affects the rural areas in less developed nations, appeared to be the major complexity. It also emerged that lack of infrastructure and information leads to reliance on the traditional ways of market information, which are ineffective. Under the risks of agricultural sector supply chain, most people are not aware of the consequences of geopolitics. The recent uprisings, such as the Arab Spring, the instability in the Middle East, and the constant threat of terrorism, comprise the real risks of geopolitics. The global opportunities, which are technological innovations and potential investment, aim towards increasing the income of farmers. Therefore, partners in agriculture should embrace more investments in terms of infrastructure in order to grow the economy of the world. Finally, there are some recommendations on how to deal with geopolitical risk. Agricultural multinational companies often practice government relations, particularly geopolitical risks. Having of local expertise, who monitor in what way new regulations can affect multinational companies is the preferred strategy. As well, food companies should form bonds or ties with ruling regime to help when uprising, such as the Arab Spring comes. While working with the current government, it may be difficult to avoid corruption, but sometimes it is necessary for businesses to have an independent worldview. Finally, communicating effectively, pointing out of supply chain vulnerabilities, and specifying neutral venue are other factors to help companies deal with geopolitical risk. Bibliography Acharya, RN, Kinnucan, HW Caudill, SB 2011. Asymmetric farm–retail price transmission and market power: a new test, Applied Economics, 43 (30), 4759-4768 Anderson, W 2012. Trucking across the border the relative cost of cross-border and domestic trucking, 2004 to 2009. Ottawa: Statistics Canada. 100-167 Ascher, W 2010. Physical infrastructure development: Balancing the growth, equity, and environmental imperatives. New York: Palgrave Macmillan. 55-100 Bolotova, Y.V. & Novakovic, A.M 2012. The Impact of the New York State milk price gouging law on the price transmission process and supermarket pricing strategies in the fluid whole milk market, Agribusiness, 28 (4), 377–399 Bosona T, Gebresenbet G., Nordmark I., & Ljungberg D 2011. 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