This article presents a new type of market link from Indonesia where the intermediary is not a wholesaler buying from farmers and delivering to the supermarket, but a ‘certifying’ agent with a close relationship with a supermarket. For a fee, the agent provides the farmers, or in this case farmers association, access to the supermarket's supply chain. The supermarket also gains in that the agent assures everything required by the supermarket will be delivered. The agent is different from a traditional wholesaler as they play no part in the physical delivery of the product. They are also different from a traditional third party certification agent as they do not just evaluate the produce for quality but also ensure the product is delivered and accepted by the retailer.

Close observation reveals that what is being ‘certified’ is not only the produce in terms of quality and delivery, but also liability in case of failure to provide the product to the supermarket by the farmers. So the service concerns certification in a broader sense, including providing commercial links between the farmers and the supermarket. To achieve these objectives, the agent has developed four innovations: institutional, marketing, financial, and technological.

The institutional innovation is that the agent organized the small farmers into a group large enough to be able to supply the volume required by the supermarket, as well as providing business organization systems and mechanisms, and building a culture that enabled the sustainability of the group. The marketing innovation is that the price and some other marketing related decision parameters, such as quality, delivery arrangement, volume, and so on are largely under the control of the farmers' group. For example, price is determined directly through negotiation by the farmers' group with the supermarket, initially with the help of the agent. The financial innovation is that the agent provides funds needed by the farmers for operational costs prior to harvest, such as input costs. Finally the agent introduced technological innovations in the form of a particular production technology and constant updates on the latest technologies.

Is there any existing theory that can explain this observed behaviour? I would say, emphatically yes. Supermarkets are business entities. The bottom line of every business is profit and long-term growth. The agent also is a business entity and from the agent's perspective linking farmers and their produce to supermarkets is a business opportunity. The innovations then are merely an effort on the part of the agent to tap the opportunity presented by supermarkets' need for reliable produce.

What we observe here is a ‘virtual integration’ of decoupled business entities, with the supermarket at one end and the farmers' association at the other. As a supermarket is a business entity, farmers have to be aligned to become a business entity within the ‘virtual integration’ in order to create an efficient supply chain. The supply chain is managed ‘virtually’ by a kind of ‘invisible hand’, where each entity involved in the supply chain pursues their business with the aim of improving efficiency and responsiveness in close co-ordination with other entities. Each focuses on its core competencies and partners with other units that have complementary capabilities for the best mix of response and efficiency in delivering the products and services for the market (Napitupulu, 2006).

It then appears that every effort of linking small farmers to dynamic markets is a business undertaking for the pursuit of profit, inherently involving a process aligning all parties toward one objective, the bottom line. In this particular case, the role of the agent is to align farmers through the innovations. This also should explain the seemingly less inclusion of small farmers, in particular poor farmers in the dynamic markets as many asserted.

Written by Togar Alam Napitupulu, Senior Economist, UNESCAP-CAPSA, Bogor, Indonesia.
(References available upon request)