Understanding the marketing chain: a case study of certified and noncertified

Transcription

1 Understanding the marketing chain: a case study of certified and noncertified cashew nut farmers Andrea Cristina Dörr Recebido em 29/abril/2008 Aprovado em 07/outubro/ 2008 Área Temática: Estratégia & Economia de Empresas Andrea Cristina Dörr, Economista pela Univ ersidade Federal de Santa Maria, Mestre em Economia Aplicada pela Escola Superior de Agricultura Luiz Queiroz da Universidade de São Paulo, é Doutoranda em Economia (ZEF) na University of Hannover (Alemanha) e faz estágio na Unit ed Nations Industrial Development Organization (UNIDO), em Vienna, Áustria. andreadoerr@yahoo.com.br Endereço: Walter-Flex-Strasse, Bonn Deutschland Sistema de Avaliação: Double Blind Review Editor Científico: Nicolau Reinhard Copyright 2008 FEA-USP/RAUSP-e. Todos os direitos reservados. Permitida a citação parcial, desde que identificada a fonte. Proibida a reprodução total.

2 RESUMEN ABSTRACT RESUMO Andrea Cristina Dorr Compreendendo a cadeia de mercado: um estudo de ca so de produtores certificados e não-certificados de castanha de caju A cadeia de frutas frescas está focando de forma crescente no valor adicionado e na redução de custos, procurando atender à demanda do consumidor. A cadeia de castanhas no Nordeste brasileiro é um caso particular para a análise da importância dos custos de transação com o intuito de produzir com mais eficiência. A pesquisa baseou-se na coleta primária de 85 entrevistas com produtores de castanha nas regiões de Mossoró e Serra do Mel. Neste artigo, tem-se como objetivo verificar o funcionamento da cadeia e analisar os arranjos contratuais entre compradores e produtores. Propõese, também, realizar uma análise do tipo de governança utilizado na referida cadeia com relação às características transacionais. O referencial teórico teve por base os conceitos da Cadeia Global de Valor e da Economia dos Custos de Transação. Os resultados mostram que os produtores com certificação comercializam com compradores individuais e os sem certificação, com a cooperativa. No que se refere ao processo de comercialização com contratos verbais, conclui-se que eles são mais longos com compradores individuais e mais curtos quando a comercialização é feita com a cooperativa, enquanto os contratos verbais com confiança são mais longos quando a comercialização é com a cooperativa. Palavras-Chave: castanha de caju, contrato, cadeia global de valor, cadeia de mercado, economia dos custos de transação. Understanding the marketing chain: a case study of certified and noncertified cashew nut farmers The fresh fruit marketing system is increasingly focused on adding value and decreasing costs by streamlining distribution and understanding customer demands. Cashew nut marketing chains in the Northeast region in Brazil offer a particularly challenging setting for the analysis of the importance of transaction costs for production efficiency and supply chain efficiency. Primary data was collected through the application of 85 questionnaires to cashew nut producers in the Mossoró and Serra do Mel region of Brazil. This paper aims to verify the functioning of the marketing chain and to evaluate the contractual arrangements between buyers and farmers. It also proposes an analysis of the type of governance used in this value chain regarding the characteristics of transactions. The theoretical background is based on the concepts of the Global Value Chain and the Transaction Cost Economics approaches. The results show that in the marketing chain, certified and non-certified farmers trade with individual buyers and the cooperative. Regarding to the trading processes with verbal agreements, it was found that they are longer with individual buyers and shorter when trading with the cooperative, whilst trust-based agreement are longer when trading with the cooperative. Keywords: cashew nuts, contract, global value chain, marketing chain, transaction cost economics. La cadena de mercado: un estudio de ca so de productore s certificados y no certificados de nuez de anacardo El mercado de frutas frescas se enfoca cada vez más en la agregación de valor y en la reducción de costos, además de buscar atender a la demanda del consumidor. El mercado de nueces en el nordeste de Brasil es un caso especial para el análisis de la imp ortancia de los costos de transacción para la eficiencia de la producción. Se recopilaron datos primarios por medio de 85 entrevistas con productores de nueces en las regiones Mossoró y Serra do Mel en Brasil. En este artículo se busca averiguar el funcionamiento de la cadena y analizar los arreglos contractuales entre compradores y productores. Se propone, además, realizar un análisis del tipo de gobierno utilizado en esta cadena con relación a las características de las transacciones. El marco teórico son los conceptos de cadena global de valor y economía de los costos de transacción. Los resultados muestran que los productores certificados comercializan con compradores individuales y los productores no certificados, con la cooperativa. En lo que concierne al proceso de comercialización por medio de acuerdos verbales, se encontró que dichos acuerdos son más duraderos con compradores individuales y de duración más corta cuando la comercialización se realiza con la cooperativa, mientras que los contratos verbales de confianza son más largos cuando se comercializa con la cooperativa. Palabras Clave: nuez de anacardo, contrato, cadena global de valor, cadena de mercado, economía de los costos de transacción. 2 R.Adm.Eletrônica, São Paulo, v.1, n.2, art.2, jul./dez. 2008

3 UNDERSTANDING THE MARKETING CHAIN: A CASE STUDY OF CERTIFIED AND NON -CERTIFIED CASHEW NUT FARMERS 1. INTRODUCTION In the beginning of the1990 s, the region of Açu/Mossoró was nominated as the Cluster of Integrated Development by the Northeast Bank due to its potential for producing irrigated fruits. The production from the Cluster of irrigated fruit culture Açu/Mossoró is considered an example of technological progress and farm organization, highlighted mainly by its position in international markets (GOMES DA SILVA, 1999). Rio Grande do Norte is the second biggest irrigated tropical fruits region in Brazil, after the Juazeiro/Petrolina Cluster only. The irrigated area has about 20,000 hectares, of which 90% is located in the region of Açu/Mossoró. The main fruits harvested are melons, bananas and mangoes. Crops like coconuts and cashew nuts, usually planted in dry areas, are being cultivated in irrigated areas as well (COSTA et al., 2007). Cashew nut production is Serra do Mel city farmers major economic product. The Cooperativa dos Beneficiadores Artesanais de Castanha de Caju do Rio Grande do Norte (Coopercaju), a cooperative located in Serra do Mel, is responsible for sorting, processing and trading cashew nuts from the region. Based on the statistics from ALICEWeb (2007), it is shown that Rio Grande do Norte State exports in 2005 were around 23% [9.7 thousand tons out of 41.8 thousand tons] of the total amount of Brazilian shelled cashew nuts (i.e. kernels). From the total volume exported by this state, 66% [6.4 thousand tons] was transported to the US and 12% [1.2 thousand tons] to the European Union. Brazil is considered the fourth largest producer of cashew nuts, after Vietnam, India and Nigeria. The objective of this paper is to verify the functioning of the marketing chain and to evaluate the contractual arrangements between buyers and farmers. Based on the types of governance presented by Gereffi, Humphrey and Sturgeon (2005), it also aims to identify and characterize the relationship among farmers, individual buyers and the cooperative. The paper proceeds as follows: after this introductory section, the theoretical background will be reviewed in the second section. Section 3 presents recent studies and Section 4 the primary data base. Section 5 presents the results followed by a final Section 6 with the main conclusions. 2. THEORETICAL BACKGROUND 2.1. Transaction cost approach Williamson (1985, p.1) considered the term transaction cost economics as the basic unit of analysis and holds that the organization of economic activity is largely understood in transaction cost economizing terms. Such economies are realized by aligning governance structures [ ] with the attributes of transactions in a discriminating way. Further, according to the author, the theory of transaction cost economics maintains that bilateral contracts are complex and invariably incomplete (1985). Furthermore, Farina, Azevedo and Saes (1997) mention that the characteristics of transactions will condition the most efficient governance form or the form expected to reduce transaction costs. They emphasize the R.Adm.Eletrônica, São Paulo, v.1, n.2, art.2, jul./dez

4 Andrea Cristina Dorr difficulties in measuring transaction costs and their identification. Thus, transaction costs are not those directly associated with production, but might appear according to the relationships between the agents and the problems in coordinating rise as a result of their activities. Arguing on vertical integration, transaction cost will be more common where (i) the cost savings gained due to asset specificity are great; (ii) design features prevent the allocation of asset to alternative use; (iii) economies of scale are small or among firms with different sizes, being the largest ones more integrated than the smallest ones; and (iv) bureaucratic costs related to internal organization are smaller (WILLIAMSON, 1985). Previously, Williamson (1979, p.253) has mentioned that the advantage of a vertical integration is that adaptations can be made in a sequential way without the need to consult, complete, or revise inter-firm agreements. Where a single ownership entity spans both sides of the transactions, a presumption of join profit maximization is warranted. Both price and quantity adjustments will be more complete than in inter-firm trading. Transaction cost involves a problem of economic organization as a problem of contracting. Thus transaction costs are distinguished between ex ante and ex post. The first are the costs of drafting, negotiating and safeguarding an agreement. The parties involved agree in advance about the contingencies. The second, ex post cost, refers to cost incurred when transactions drift out of alignment, cost associated with the governance structures and cost related to security commitments (WILLIAMSON, 1985) Value chain approach The concept of governance [ ] is central to the global value chain approach [ ] the concept is used to refer to the inter-firm relationships and institutional mechanisms through which non-market co-ordination of activities in the chain takes place. This coordination is achieved through the setting and enforcement of product and process parameters to be met by actors in which developing country producers typically operate (HUMPHREY and SCHMITZ, 2001, p.3). Humphrey and Schmitz (2001, p.4) use the concept of governance to express that some firms in the chain set and/or enforce the parameters under which others in the chain operate. A chain without governance would be a string of market relations. Thus, the importance of governance is highlighted in the value chain using the four following reasons: (i) market access [access of producers to new markets is limited to a few buyers]; (ii) fast track to acquisition of production capabilities [producers who gain access to chains of lead firms need to be able to improve continuously]; (iii) distribution of gains [governance facilitates the understanding of the gains distribution]; (iv) leverage points for policy initiatives [besides the fact that global value chains offer leverage points for government initiatives, they can also 4 R.Adm.Eletrônica, São Paulo, v.1, n.2, art.2, jul./dez. 2008

5 UNDERSTANDING THE MARKETING CHAIN: A CASE STUDY OF CERTIFIED AND NON -CERTIFIED CASHEW NUT FARMERS undermine government policy]; and (v) funnel for technical assistance [to combine technical assistance with connectivity]. Keesing and Lall (1992) argued that producers in developing countries are expected to meet requirements that frequently do not apply to their domestic market. For instance, this creates a gap between the capabilities required for the domestic market and those required for the international market. This gap is widened when the buyers require consistent quality and supply, creating two reasons for quasi-hierarchical governance. The first refers to monitoring and control that might be required to ensure that products and processes achieve the required standards. The second reason, in case the gap needs to be closed quickly, is that buyers will need to invest in a few selected suppliers and help them upgrade. Buyers mostly have a higher interest in suppliers according to their relationships. Gereffi, Humphrey and Sturgeon (2005, p.83) propose a more complete typology of value chain governance, divided into five types. The first, markets (the cost of shifting the partner is low for buyers and sellers). The second, modular value chains (suppliers make the products according to the customers specifications, detailed more or less by the former). The third, relational value chains (complex interactions among buyers and sellers, often creating mutual dependence and high level of asset specificity). The fourth, captive value chains (small suppliers are transactional dependent on larger buyers, characterized by a high degree of monitoring and control by lead firms). Finally, hierarchy is characterized by vertical integration. In the same study, the authors developed a theory of value chain governance based on three factors: (i) the complexity of information and knowledge required to sustain a particular transaction with respect to product and process specifications, (ii) the extension in which knowledge and information are codified and transmitted efficiently and (iii) the capabilities of actual and potential suppliers regarding the requirements of the transaction. 3. LITERATURE REVIEW 3.1. Empirical evidences on the marketing chain An analysis of the marketing chain reveals that fruits are perishable and of high value and once harvested, they continue to ripen. The process can be delayed only slightly with refrigeration. Consequently, disastrous quality losses can occur at any stage in the marketing chain from grower to consumer and the total value of the product may be lost. Therefore, every activity in the production and marketing chain must be precisely timed (JENSEN and RORABAUGH, 2007). There are different marketing chains for fruits and vegetables which differ among countries, crops and farmers. The most important stage to understand is the first link in the production or the so-called marketing chain, between the farmer and the trader (FAO, 1989). The banana market structure is very heterogeneous, depending on the producing and importing countries. The presence of diverse economic actors is also different among countries and regions at the several stages of the banana chain. Due to high perishability, bananas require a careful control of the growing, packaging, transport, ripening and distribution processes. This leads to a highly vertically integrated banana sector, where large transnational companies tend R.Adm.Eletrônica, São Paulo, v.1, n.2, art.2, jul./dez

6 Andrea Cristina Dorr to control right from direct growing of bananas in producing countries, through ownership of specialized refrigerated shipping and ripening facilities to distribution networks in importing countries. An analysis of the banana marketing chain reveals that companies are facing the challenge of the increasing role that is being played by supermarkets and retail chains in the distribution of bananas in developed countries, mainly in the United States (US) and European Union (EU). Supermarkets tend to build long-term relationships with preferred suppliers in order to guarantee a continuous supply at the required level of quality (UNCTAD, 2007a). Similarly, The United Nations Conference on Trade and Development (UNCTAD, 2007b) developed a study on the citrus marketing chain. The major supplier of orange juice is Brazil, while Europe is the major market for exports. According to the marketing chain, the most significant distribution channels for orange juice and fruit juices are the global retail chains, responsible for more than 80% of the total exported to Europe. Cueller (2003) attempted to identify the current status of imported fruits and vegetables at retail level and to identify challenges faced by these participants in marketing imported produce in the US market. The study reveals that the key issues in the marketing of imported fruits and vegetables among retailers are food safety assurance, transportation cost reduction and quality improvement. Further, the key issues faced by exporters in marketing their products include improving packaging, adding value to products and assuring food safety Prevalence of legal food standards in the organic sector In Brazil, according to the Planeta Orgânico (2007), there are 18 certifying companies able to certify organic products such as fruits, vegetables, dairy products, sugar, poultry, coffee and grains. The Institute of Biodynamic Certification Association (Associação de Certificação Instituto Biodinâmico IBD) is one of the companies that work with the certification and control of organic and biodynamic production. According to this company, the certification procedures involve, apart from other requirements, a process to convert the land, which lasts about 2 to 3 years. This process is accompanied by extension workers who inspect the land and guide the producers during all stages (IBD, 2007). The Normative n.7, from 1999, of the Ministry of Agriculture, Livestock and Food Supply presents in details the production rules, grading, processing, packing, distribution, identification and quality certification for the organic products. In addition, in 2003, it regulated the organic agriculture through the Law n , from 2003, establishing principles, social conditions, control mechanisms and the Brazilian system to evaluate accredited organizations, among others. The Normative n.16, from 2004, regulated the procedures to register raw material and organic products in the Ministry of Agriculture, Livestock and Food Supply. In 2005, the Decree n.5591 established the norms of security and mechanisms of control concerning genetically modified organisms (GMO) and derivates seeking the development of research on biotechnology areas. 6 R.Adm.Eletrônica, São Paulo, v.1, n.2, art.2, jul./dez. 2008

7 UNDERSTANDING THE MARKETING CHAIN: A CASE STUDY OF CERTIFIED AND NON -CERTIFIED CASHEW NUT FARMERS 3.3. Empirical evidences on transaction cost approach Transaction costs between buyers and sellers have several dimensions. First, they include information search cost for quality and food safety, second, cost for negotiations and third, the costs for monitoring and enforcement (HOBBS, 1996). Consequently, the higher the transaction cost is, the less likely the transaction will occur. Furthermore, international standards help to ensure technical compatibility across countries and convey information to consumers about products that have been produced abroad or processes that take place in another country. International standards, thus, reduce transaction costs and facilitate international trade (WTO, 2005). The institutional framework of the certification scheme is important for the continuing development of the organic market. The survey tries to capture the experiences and attitudes of organic farmers. A better understanding of farmers attitude is necessary to increase acceptance and to guarantee the confidence of the consumers in organic certification in the long run. The results show that although majority of the farmers accept the organic certification system, they are not convinced of its cost-benefit relationship. Mainly, the bureaucratic burden decreased its acceptance. The farmers prefer a more association and device-oriented control of organic certification (SCHULZE, JAHN and SPILLER, 2007). The idea behind certification systems is to reduce existing information asymmetries, especially in the case of goods, including credence attributes such as food safety, organic production and animal welfare. In the supply chain, consumers and suppliers are confronted with information uncertainty. Consumers are not able to detect opportunistic behavior. In order to reduce both consumers and suppliers uncertainty, retailers and brand manufacturers can monitor their suppliers production process themselves via second party audits (CASWELL, BREDAHL and HOOKER, 1998). Lu (2005) uses a composite of various indicators to measure the effects of different variables of transaction costs on the technical efficiency of the tomato supply chain. The four categories of transaction costs are: (a) transportation costs: depending on distance, time, road conditions and availability of own means of transport, (b) information costs: depending on the number of traders visited before selling and the sources of access to market information, (c) negotiation costs: related to the number of visits for reaching an agreement for the rice selling and (d) monitoring costs: related to the number of years that the farmer is engaged with the trader. Christensen et al. (2003) analyze the consumer perceptions of certifying agencies to certify beef products according to aspects regarding food safety and quality in the US and United Kingdom (UK). While US consumers see the role of the federal government in assuring food safety, UK consumers prefer the private sector. Thus, the validity of the certification signal begins with the customer, who depends on credible quality labels when making purchasing decisions. Dörr (2004) studied the poultry sector in Brazil regarding the compliance of this industry upon the requirements on food safety, quality and animal welfare of wholesalers and retailers in Europe. The New Institutional Economics and the Transaction Cost Economy Theory were used as the conceptual background. The transaction cost increased due to changes in the contractual R.Adm.Eletrônica, São Paulo, v.1, n.2, art.2, jul./dez

8 Andrea Cristina Dorr relationships between the poultry industry and the input suppliers. Neves (1999) analyzed the orange juice chain using the supply chain management and the perspective of transaction cost economics approach as theoretical background. His aim was to analyze the transaction cost between fruit growers and the processing industry in Brazil based on 20 interviews. The findings reveal that the transactions cost between fruit growers and the industry still has to be coordinated better for the chain to be more competitive, to reduce costs, to guarantee supply and to make contracts more trustful. 4. METHODOLOGY A survey of 85 farmers was conducted from October to December 2006 in the region of Mossoró, Rio Grande do Norte State, in Brazil. The study considered small producers (<49 ha) of cashew nuts with organic certification and those without it. The population of producers with certification was 47 farmers and the producers without certification were around 1,000. There are no medium (>50 and <99 ha) and large producers (>100 ha) in the region. The study followed a two-stage stratified sampling technique according to Levy and Lemeshow (1999). The area was purposively sampled because they are the leading producers of cashew nuts. The first stratum included only small producers in the regions. The final step involved the identification of producers with and without organic certification. The sample size of each stratum was calculated using the Russlenth * (power =1) program. For the purpose of this paper, producers without certification were considered as one group (70% or 60%) and certified producers as another (30% or 25%). The questionnaire applied to small certified and non-certified cashew nuts farmers is divided into five categories: characteristics of the farms and the producers; information cost; cost to certify; future expectations and trading. The questionnaire was composed mostly of closed questions. Farmers were selected randomly. To facilitate the interview, the questionnaires applied for certified and non-certified farmers were done separately, since many questions regarding certification were not applicable for non-certified farmers. Quantitative and qualitative analyses were performed using SPSS software. For the descriptive statistics in this survey, t-test and the correlation analysis were applied at 90% confidence level. 5. RESULTS AND DISCUSSIONS 5.1. Marketing chain A simplified representation of the cashew nuts marketing chain is presented in the Figure below. The diagram reveals how certified and non-certified farmers trade with individual buyers and the cooperative. The final destination of the products sold to individual buyers is mainly targeted at the domestic market, while those sold to the cooperative are targeted at both * Available on the website < 8 R.Adm.Eletrônica, São Paulo, v.1, n.2, art.2, jul./dez. 2008

9 UNDERSTANDING THE MARKETING CHAIN: A CASE STUDY OF CERTIFIED AND NON -CERTIFIED CASHEW NUT FARMERS international and domestic markets. Individual buyers come to the farm to collect the production while those who trade with the cooperative depend on someone who comes to the farm. Basically, the type of relationship between buyer and farmer is a verbal trust-based agreement. Type of Producer Non-Certified Certified Type of Product Cashew Nuts and Kernel Marketing Channel Individuals (Middleman and Buyer Cooperative Destination of the Products Domestic Market International Market Transportation Farmers Take the Production to the Final Destination Buyer Comes to the Farm to Take the Production Contractual Arrangements Trust-Based Vverbal Marketing Chain of Cashew Nuts As Table 1 shows, most of the results are not statistically significant, meaning that certified and non-certified farmers have similar behavior regarding the marketing channel chosen for their products. Around 13% of non-certified and 8% of certified producers that reported selling kernel to one single individual is statistically significant at 1% level. Nevertheless, the remaining analyses do not present statistic differences between both groups. 83% of non-certified and 32% of certified farmers indicated selling cashew nuts to single individuals as well. On the other hand, nearly 16% of certified producers and 5% of noncertified producers indicated selling their kernel production to the cooperative, compared to 16% and 8% who sell cashew nuts, respectively. Further, an analysis on the number of years that producers have been selling to a specific buyer shows that the non-certified producers of cashew nuts have been operating with their respective buyers for an average of 3.1 years, while the certified ones have an average of only 2.4 years. The results regarding the producers, who sold cashew nuts to a group and kernel individually or to the cooperative, indicate an average of zero years. Thus, the figure shows the way the trading process has developed in the region. First, both set of producers used to sell only cashew nuts individually, second, they started to trade with the cooperative, third, farmers started to process the raw nuts to sell either individually or to the cooperative in R.Adm.Eletrônica, São Paulo, v.1, n.2, art.2, jul./dez

10 Andrea Cristina Dorr Table 1 Marketing Channel for Cashew Nuts and Kernel Description of the Variables Cashew nuts Producers Non- Certified Certified Chi²,t test Sig. If producer is selling individually (in %) *** If producer is selling to the cooperative (in %) Amount of years trading individually (mean value) Amount of years trading with the cooperative (mean value) Kernel If producer is selling individually (in %) If producer is selling to the cooperative (in %) Amount of years trading individually (mean value) Amount of years trading with the cooperative (mean value) Dependent Variable: certified [n=25] and non-certified producers [n=60]. *** Statistically significant at 1% level;** at 5% level; * at 10% level Final destination of the products This section focuses on the volume sold and the final destination of the products (Table 2). Of the percentages considered, 100% of the production was either sold individually or to the cooperative. Among the possibilities, farmers have the choice to sell both processed nuts (kernels with higher value added) and unprocessed nuts (nuts with lower value added). Thus, farmers can also buy raw cashew nuts from their neighbors, process them and sell the kernels. The results show that none of them sold cashew nuts at the domestic market, while 40% and 48% of them sold cashew nuts and kernels to the cooperative. After certification, producers continue to mainly to sell 8% of the production of cashew nuts and 48% of kernels to the cooperative. With respect to the non-certified producers, 88% mentioned that their cashew nuts production was sold on the domestic market. Thus, having organic certification did not affect the volume sold to the cooperative. Moreover, all producers were asked to mention whether they intended to export to other markets or not. Surprisingly, there is no expectation to change to other markets. The choice to sell to a single individual in the case of non-certified farmers can be explained by the fact that there is no other possible option to sell the products. 71% of the producers surveyed explained that there is no other possible buyer and, therefore, no alternatives. It is important to consider that 83% of the non-certified farmers are concentrated in this segment of selling individually. In fact, 68% of the producers indicated that the main reason for selling through a cooperative was that it offered a guarantee of sale. The second reason, with 56%, refers to easy access to markets and finally, with 52%, the access to information. 10 R.Adm.Eletrônica, São Paulo, v.1, n.2, art.2, jul./dez. 2008

11 UNDERSTANDING THE MARKETING CHAIN: A CASE STUDY OF CERTIFIED AND NON -CERTIFIED CASHEW NUT FARMERS After the harvest, some producers decide to transport the products to the respective buyer using their own means of transport while others wait for the buyer to collect the products at the farm gate. The decision of whether to transport the products themselves depends not only on the characteristics of the producer but also on the type of product. For instance, 87% of the noncertified and 32% of certified producers have their cashew nuts transported by the cooperative. The case where the certified producers transport the kernels themselves to the buyer is around 52%. Table 2 Description of the Variables Final Destination of Cashew Nuts and Kernel Production Certified Before After Non- Certified Cashew nuts (non-processed) Domestic market (in %) Cooperative (in %) Kernels (processed) Domestic market (in %) Cooperative (in %) Transportation If buyer comes to the farm to buy the kernel production (in %) If the producer takes the production to the final buyer (in %) If buyer comes to the farm to buy the cashew nuts production (in %) Dependent Variable: certified [n=25] and non-certified producers [n=60] Contractual arrangements The current analysis refers to the type of relationship between producer and buyer: written contracts, verbal contracts based on trust and verbal contracts only. The verbal contract based on trust relates to settlements between producer and buyer after a certain number of successful negotiations. Farmers were asked to indicate the number of negotiations and how they perceived trading with each buyer. It was expected in the study that certified producers would have more written contracts than producers without certification. More specifically, almost 76% of the certified farmers and 64% of the non-certified ones reported dealing with the buyer through a verbal contract trust-based. Furthermore, about 33% of non-certified producers have a mere verbal contract with the buyer compared to 16% of certified ones and, surprisingly, only 8% of the certified producers have a formal written contract (Table 3). However, findings of the study are contrary to the expectations. The findings indicate that certification do not play a significant role in changing the type of agreement. Although certification allows farmers to upgrade, it did not affect, as expected, on safer and better agreement conditions. R.Adm.Eletrônica, São Paulo, v.1, n.2, art.2, jul./dez

12 Andrea Cristina Dorr Table 3 Description of the Variables on Contractual Arrangements Description of the Variables Producers Certified Non-certified Chi²,t test Sig. Written contracts (in %) * Verbal trust-based contracts (in %) Verbal contracts (in %) * Dependent Variable: certified [n=25] and non-certified producers [n=60]. *** Statistically significant at 1% level;** at 5% level; * at 10% level. An analysis on formal contracts is not presented due to the low number of cases [3]. Nevertheless, a deeper analysis on the contractual arrangements through verbal trust-based and only verbal agreements in the cashew nuts sector, regardless of whether producers have a certification or not, reveals that farmers have been trading for a longer period of time with middlemen or specific consumers [4 times] than with the cooperative [2.5 times] via verbal agreements (Table 4). Table 4 Negotiations with Trust Between Buyer and Producer Details of the Negotiation (Mean Value) Verbal Trust-Based (N=56) Verbal Agreements (N=24) Indiv. Coop. Indiv. Coop. Number of trading Payment in cash (in %) Payment in advance (in %) Payment on account (in %) Non-payment (in %) Price is determined by the buyer (in %) Price is determined by the producer (in %) Kernel in full shape (in %) Buyer acquires any kind of cashew (in %) If buyer is not flexible in the negotiations (in %) Although both types of buyers determine the final price, individua l buyers pay cash for the products [100%] while the cooperative pays on account [100%]. The rates of non-payment are as low as 4.5% for those who sell to individual buyers and zero for those who sell to the cooperative. Additionally, the results also show that the buyers have not been flexible in the 12 R.Adm.Eletrônica, São Paulo, v.1, n.2, art.2, jul./dez. 2008

13 UNDERSTANDING THE MARKETING CHAIN: A CASE STUDY OF CERTIFIED AND NON -CERTIFIED CASHEW NUT FARMERS negotiations for 68% and 50% of trading with individual and the cooperative, respectively. In this type of agreement, the buyer is willing to buy products which range from low to high quality. Furthermore, farmers have been trading during 5 harvesting periods with the cooperative through a verbal trust-based contract compared to three times more trading with individual buyers. Even though the buyers are not flexible in the negotiations [66% and 82% for individuals and the cooperative, respectively], the buyers also exert high power in determining the price. Nevertheless, the cooperative wants to acquire a higher quality of kernel [87%] as compared to selling to an individual [47%]. Regarding payments, the cooperative pays part of the payment [57%] in advance, while the remaining is cash [37%] and on account [5%]. Payments done by individual buyers are mainly cash [78%]. For both type of buyers, the nonpayment rate is significant: 8% and 4% for trading with individual and the cooperative, respectively. The types of governance can be used to illustrate the way power operates in global value chain of cashew nuts. Trading agreements based on either verbal or trust-based contracts are characterized as a market type of governance with arms length market relations in the case of individual buyers. These market linkages can persist over time with repeated transactions with the cost of partner shifting being low for both agents. The results show that buyers, generally, do not require a specific type of product, although they are not very flexible in the negotiations. In this case, negotiations are related more to payment conditions than to quality specifications. The type of governance present in the case of trading with the cooperative based on trust contracts is the modular value chain. It is characterized by network relationships in which suppliers make the products according to the customers specifications, detailed, more or less, by the former. The cooperative and the buyers have already experienced many trading negotiations, which contribute to increasing trustiness for both agents. The results also indicate that the payment conditions and the type of product are well-defined. Nevertheless, verbal agreements with the cooperative lead to a market type of governance. In this case, the relationship is characterized by the buyer s power exerted on one side of the value chain with regards to type of payment [on account], by determining the price and lack of requirement of the type of product. 6. CONCLUSIONS The cashew nut marketing chain shows that certified and non-certified farmers trade with individual buyers and the cooperative. The final destination of the products sold to individual buyers is mainly targeted at the domestic market, while those sold to the cooperative are targeted at both international and domestic markets. Basically, the type of relationship between buyer and farmer is a verbal trust-based contract. The results lead to two main streams based on the type of agreement. First, trading processes with verbal agreements are longer with individual buyers and shorter when trading with the cooperative. Both types of buyers exert a major influence in determining the final price. Individual buyers pay cash and present low rates of payment failure R.Adm.Eletrônica, São Paulo, v.1, n.2, art.2, jul./dez

14 Andrea Cristina Dorr while the cooperative pays on account and there are no cases of payment failure. Both buyers are willing to acquire products with any quality standards. Hence, they are more flexible in the negotiations. Second, the characteristics of verbal trust-based agreement include longer trading time with the cooperative. Thus, the cooperative pays in advance and in cash, it determines the price, focuses mainly on high quality kernel and it is not flexible for negotiation. In opposition, the trading period with individual buyers is shorter, most of them pay cash for the products. They determine the price, buy products with any type of quality and are more flexible for negotiation. Considering the type of governances found in this sector, farmers, trading either via verbal or trust-based contract with individual buyers, have potential to reach a more sophisticated governance structure. Monitoring and controlling is required to ensure that products and processes meet the required standards. It was expected that with organic certification, farmers would be able to upgrade to a more sophisticated market and marketing channel. Nevertheless, results show that this sector needs to focus in new technologies, better farm organization and management. Although the adoption of certification did not affect the volume traded with stricter buyers, it is important to consider that the trend is recent in the sector and region. In addition, farmers have to register the production cost to be able to calculate the final price of the products. The extent to which farmers are willing to invest and upgrade is visible in cases in which farmers had already decided to certify. The expectation to receive a higher price for the certified product and to access more refined marketing channels play the major role as incentives. Organizations in the region should invest in training courses and managerial skills in order to increase the number of certified farmers. Further, they could facilitate contacts between buyers and farmers and provide support for future agreements. This could help farmers to decrease transaction cost. The reasons motivating farmers to vertically integrate are the reduction in transactional costs resulting from the economies of scale and the need to ensure consistent quality supply through the adoption of certification. Given the highly competitive advantages of the region, cashew nut farmers still have to upgrade to new technologies in order to improve efficiency and competitiveness, which is achieved by having control over the upstream operations, from production to distribution. ACKNOWLEDGEMENTS The author is thankful to the German Academic Exchange Service (DAAD) and the German Ministry for Economic Cooperation and Development (BMZ) for their financial support. 14 R.Adm.Eletrônica, São Paulo, v.1, n.2, art.2, jul./dez. 2008

15 REFENCES UNDERSTANDING THE MARKETING CHAIN: A CASE STUDY OF CERTIFIED AND NON -CERTIFIED CASHEW NUT FARMERS ANÁLISE D AS INFORMAÇÕES DE C OMÉRCIO EXTERIOR VIA INTERNET ( ALICEWeb). Ministério do Desenvolvimento, Indústria e Comércio Ex terior (MDIC). Secretaria de Comércio Ex terior. Base de dados Disponível em: <aliceweb.desenvolvimento.gov.br>. Acesso em: 24 set ASSOCIAÇÃO DE CERTIFICAÇÃO INSTITUTO BIODINÂMIC O IBD CERTIFICAÇÕES. Informações Disponível em: < Acesso em: 25 set BRASIL. Ministério da Agricultura, Pecuária e Abastecimento (MAPA). Instrução Normativa n.7, de l7 de maio de Estabelece as nor mas de produção, tipificação, processamento, envase, distribuição, identificação e certificação da qualidade para os produtos orgânicos de origem vegetal e animal. Diário Oficial da União, Brasília, DF, 19 maio Seção 1, p.11.. Lei n , de 23 de dezembro de Dispõe sobre a agricultura orgânica e dá outras providências. Diário Oficial da União, Brasília, DF, 24 dez Seção 1, p.8.. Instrução Nor mativa n.16, de 11 de junho de Estabelece os procedimentos a serem adotados, até que se concluam os trabalhos de regulamentação da Lei n , de 23 de dezembro de 2003, para registro e renovação de registro de matérias-primas e produtos de origem animal e vegetal, orgânicos, junto ao MAPA. Diário Oficial da União, Brasília, DF, 14 jun Seção 1, p.4.. Decreto n.5.591, de 22 de novembro de Regulamenta dispositivos da Lei n , de 24 de março de 2005, que estabelece nor mas de segurança e mecanismos de fiscalização sobre a construção, o cultivo, a produção, a manipulação, [...] e o descar te de organismos geneticamente modificados ( OGM) e seus derivados. Diário Oficial da União, Brasília, DF, 23 nov Seção 1, p.1. CASWELL, J.A.E.; BREDAHL, M.E.; HOOKER, N.M. How quality management systems are affecting the food. Review of Agricultural Economics, v.20, n.2, p , CHRISTENSEN; B.J.; BAILEY, D.; HUNNICUTT, L.; WARD, R. Consumer preferences for public and private sector: certifications for beef products in the United States and the United Kingdom. International Food and Agribusiness Management Review, v.6, n.3, COSTA, A.C.; TRINDADE, D.C.; PAIVA, D.; CAMELO, G.L.P.; COSTA, P.C.P. O potencial fruticultor do Rio Grande do Norte gerando oportunidades no mercado internacional. In: CONGR ESSO DE PESQUISA E INOVAÇÃO DA REDE N ORTE NORDESTE DE EDUCAÇÃO TECNOLÓGICA, 2., 2007, João Pessoa/ PB. Anais... João Pessoa, CUELLER, S. Marketing fresh fruit and vegetables impor ts in the United States: status, challenges and opportunities. Smart Marketing Newsletter, Mar DÖRR, A.C. O posicionamento da indústr ia avícola frente às restriçõ es do mercado consumidor europeu p. Disser tação (Mestrado) Escola Super ior de Agricultura Luiz de Queiroz da Universidade de São Paulo, Piracicaba, São Paulo, Brasil. FARINA, E.M.M.Q.; AZEVEDO, P.F. de; SAES, M.S.M. Competitividade: mercado, estado e organizações. São Paulo: Singular, p. FOOD AND AGRICULTURE ORGANIZATION OF THE UNIT ED NATIONS (FAO). Hor ticultural marketing - a resource and training manual for extension officers. FAO Agricultural Services Bulletin, n.76, Rome, Italy, GEREFFI, G.; HUMPHREY, J.; STURGEON, T. Review International Political Economy, v.12, n.1, p , GOMES DA SILVA, A. Trabalho e tecnologia na produção de frutas irrigadas no Rio Grande do Norte. In: CAVALCANTI, J.S.B. ( Org.). Globalização, trabalho, meio ambiente: mudanças socioeconômicas em regiões frutícolas para exportação. Recife, v.1, p R.Adm.Eletrônica, São Paulo, v.1, n.2, art.2, jul./dez

16 REFENCES Andrea Cristina Dorr HOBBS, J. Transaction costs and slaughter cattle procurement: processors' selection o f supply channels. Agribusiness, v.12, Issue 6, p , HUMPHREY, J.; SCHMITZ, H. Governance in global value chains. IDS Bulletin, v.2, n.3, JENSEN, M.; RORABAUGH, P. Growing tomatoes hydroponically. University of Arizona, Disponível em: < Acesso em: 07 jan KEESIN G, D.; LALL, S. Marketing manufactured exports from developing countries: learning sequences and public suppor t. In: HELLEIN ER, G. (Ed.). Trade policy, industrialization and development. Oxford: Oxford University Press, LEVY, P.S.; LEMESH OW, S. Sampling of populations: methods and applications. 3 rd ed. Wiley & Sons, LU, H. A two-stage value chain model for tomato marketing chain efficiency evaluation: a transaction cost approach. In: INTERNATIONAL PENSA CONFER ENCE ON AGRI-FOOD CHAINS / NET WORKS ECONOMICS AND MANAGEMENT IN TRACK SUPPLY CHAIN MANAGEMENT, 5., 2005, July 27-29, Ribeirão Preto, Brazil. Proceedings... R ibeirão Preto: PENSA, NEVES, M.F. The relationship of orange growers and fruit juice industry: an overview of Brazil. Journal for the Fruit Processing and Juice Producing European and Overseas Industry (Fruit Processing/Flussiges Obst), Schönborn, Ger many, v.9, n.4, p , PLANETA OR GÂNICO. Informações Disponível em: < Acesso em: 24 set SCHULZE, H.; JAHN, G.; SPILLER, A. Acceptance and motivational impact of the organic certification system D isponível em:< Acesso em: 07 jan UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT (UNCTAD). Banana. 2007a. Disponível em: < Acesso em: 07 jan C itrus fruit. 2007b. Disponível em: < Acesso em: 07 jan WILLIAMSON, O. Transaction-cost economics: the governance of contractual relations. Journal of Law and Economics, v.22, n. 2, p , The economics institutions of capitalism: firms, mar kets and relational contra cting. New York: The Free Press, p. WORLD TRADE ORGANIZATION (WT O). World Trade Report Disponível em: < t05_e.pd f>. Acesso em: 07 jan R.Adm.Eletrônica, São Paulo, v.1, n.2, art.2, jul./dez. 2008