Vertical integration, agriculture, governance and Sesame Street

“Let us call this cooperation. No let us call it sharing.” – Geefle and Gonk, Sesame Street (1973)

Recently, the Department of Agriculture announced that it will promote vertical integration to address several issues in the agricultural sector including smuggling and hoarding.

Normally, a company or sector specializes in one aspect of the supply chain only. In agriculture, for example, most companies or sectors focus on production. Then fewer groups focus on processing. Other companies then, focus on logistics and post-harvest facilities. The end of the chain, which is retail and marketing, is handled by retail outlets and platforms.

In this situation, one company or group of companies who control and monopolize one aspect of the chain, can manipulate the situation and produce negative results. A few months ago, a group of companies who control post-harvest facilities, such as cold storages, were able to deny farm producers space in the said facilities thereby giving their group the ability to control supply and demand and increase prices of goods such as onions. Without vertical integration, a group of companies or other organizations can hold hostage the entire value chain by blocking a key gateway in the chain and driving the prices high.

Vertical integration occurs when a company takes ownership of two or more key stages of the supply chain. In agriculture, for example, vertical integration can occur when one group or sector take on two or more aspects such as production and post-harvest or production and retail or other combinations. In business, vertical integration allows a company to streamline operation by taking direct control of its supplier side, manufacturers, distributors and retail platforms rather than outsourcing them which results in reduced cost and increased efficiency, if done correctly.

In the Philippines, fast food giant Jollibee, is the epitome of efficient vertical integration as the brand controls the manufacture of its primary products, logistics and sale of the products through retail outlets. In the US, several companies, such as Tyson Foods, is a primary source of meat products who owns retail stores that sell such meat.  

There are some who argue that vertical integration can lead to market concentration which can lead to limits to competition and increased prices, too. However, the increasing population will continue to push companies to improve efficiency and reduce costs which vertical integration provides.

In the Philippines, the concept of vertical integration for agriculture will not only involve the government attempting to integrate the supply chain to prevent manipulation but, private sectors including business and NGO’s who can merge into joint ventures or consortiums that can manage production, logistics, post-harvest, marketing and retail.

Why stop with vertical integration in agriculture? Vertical integration among all levels of governance and the private sector can greatly speed up many projects of the government. For projects like roads and rail cooperation among the national and local levels can help solve challenges in project implementation such as informal settlers and other right of way issues and the conflict of interests in the said levels.

There is also the concept of horizontal integration where co-equal agencies of governments can coordinate and cooperate under one umbrella, avoid turf wars or bragging rights, and actually work together to achieve several project milestones.

At the core of integration, whether vertical or horizontal, is cooperation and coordination. For the generation X and millennials, these concepts have long been taught to us through various means. In fact, for the those of us who grew up with Sesame Street, the tale of the Geefle and Gonk will always come to mind. In that 1973 Sesame Street skit, Geefle is a tall creature with long arms that could not be bent, while Gonk is a short creature with normal arms. Their favorite food was the nectarine found on a tall tree. Gonk was too short to reach the fruit while Geefle could reach it but could not bend his hands to feed himself. They realized that they need to work together to eat. The Geefle could pick the nectarine from the tree then drop it near the Gonk. The Gonk could then eat half while feeding the Geefle with the half.

Maybe it is time we focus on cooperation and coordination instead of competition.

This is my oblique observation.

Editor’s note: The opinions expressed in the foregoing article are solely the author’s and do not reflect the opinions and beliefs of the Philippine News Agency (PNA) or any other office under the Presidential Communications Office.