Effects of Traceability on the Brazilian Beef Agribusiness System

Transcription

1 Effects of Traceability on the Brazilian Beef Agribusiness System Marcela de Mello Brandão Vinholis 1 lpbvfi@netsite.com.br Prof. Dr. Paulo Furquim de Azevedo 2 dpfa@power.ufscar.br Universidade Federal de São Carlos Engenharia de Produção Rod. Washington Luiz, Km 235. CEP São Carlos SP Keywords: Beef Agribusiness System, Traceability, Transaction Costs. ABSTRACT: The consumer of the food industry, more specifically the beef industry, makes his decision in an environment of asymmetric information. Allied, the advents of Bovine Spongiform Encephalopathy generated an enormous concern in European consumers about food safety. In order to deal with this problem, the authorities began to demand more accurate information about all the commercialized beef in the European Union (EU). This paper aims to evaluate the impacts of this institutional change in the international beef market the obligation of the traceability by the EU - on the organizational structure and the transactions between slaughterhouses and downstream and upstream agents in Brazil. The expected impacts depend on the type of traceability effectively adopted partial or perfect. The actual model of traceability in Brazilian beef chain has no significant impact on the observed strategies and governance structures. 1 Graduate Student at Universidade Federal de São Carlos. Area: Agribusiness System Coordination. 2 Joint Professor at Universidade Federal de São Carlos.

2 INTRODUCTION The widespread use of spot market transactions, without the required control and standardization, constraints the competitiveness of Brazilian beef chain, both in the domestic and foreign markets (Favaret Filho, 1998). Among the main problems, the lack of traceability limits the ability to control information about final products. Inasmuch as consumption trends indicate a greater concern about food safety, product information such as process of production is increasingly demanded. Therefore, consumption trends threat the governance structure in use in the Brazilian beef chain. Given the lack of traceability, some information more specifically, those belonging to credence goods is not available, increasing information costs and constraining trade (Barzel, 1982). The episode of the Bovine Spongiform Encephalopathy (BSE) was an important element that induced new regulation in the EU market, among then, the need of a traceability system in the meat imported by those countries. This institutional change may imply depending on the type and the degree of control demanded by the traceability system specific investments by slaughterhouses. As a consequence, this may induce the adoption of governance structures that provide greater control over transactions in the beef chain (Williamson, 1996), what constitutes the main hypothesis of this research. The paper aims to evaluate the effects of this institutional change in the international meat trade the obligation of traceability in EU meat imports on the organizational structure (internal transactions) and contractual relations (external transactions) of Brazilian slaughterhouses. A multi-case study with three meat exporters provides the elements to state the main conclusions. The paper has five sections besides this introduction. The first summarizes the competition pattern and the governance structures that characterize Brazilian slaughterhouse industry, the agent responsible to provide a traceability system. The second deals with the

3 increasing consumer concern about food safety, mainly in the international market. The third defines the concept of traceability and its different types. The forth evaluate the effects of the obligation of traceability and the fifth states the main conclusions. 1. BRAZILIAN SLAUGHTERHOUSE INDUSTRY: main features The slaughterhouses, the agents mostly affected by the need of traceability, constitute a heterogeneous industry, both in terms of competition pattern and governance structures adopted. In order to analyze the effects of traceability system on the Brazilian beef chain is necessary to distinguish what agents are more directly affected. This analysis begins with the identification of the different strategic groups in the slaughterhouse industry and the description of the governance structures employed by them Strategic Groups The beef chain can be divided in two main subsystems 3, that distinct two strategic groups 4 : (1) the first, compounded by cattle-raisers with high technical standards, slaughterhouses inspected by SIF (Federal Inspection System), that supply domestic hyper and supermarkets, high class meat stores and international market; and (2) the second group, that presents agents with low technical standards, without adequate sanitary inspections, using traditional market channels, such as street market (Batalha e Silva, 2000). Slaughterhouses from strategic group 2 have low or no entry barriers, inasmuch as they are not subject to sanitary and fiscal inspections (illegal operation), operate in small scales, what conduces to a highly competitive industry structure. They also have the advantage of operating at the same price level as the inspected industry (adverse selection 3 These two subsystems do not exhaust all possibilities, but both account for the major part of production (Batalha e Silva, 2000). 4 Porter (1989) define grupos estratégicos como um conjunto de firmas que utilizam as mesmas variáveis chave de concorrência, como resultado de estratégias não cooperativas.

4 problem), without the sanitary and fiscal costs. On the other hand, strategic group 1 is characterized by a higher concentration ratio (CR4 = 51,16%, in 1997), higher scale and sanitary control, more qualified labor force, specific investments in freezers etc. In this industry, plant specific investments are relevant sunk costs, but some slaughterhouses contract the facilities of other firms, due to the high idle capacity. The absence of formal contracts and a trust relationship between cattle-raisers and slaughterhouses from strategic group 2 and from these and the retailers makes the entrance easier in this segment, allowing for hit and run strategies. Therefore, the market in which this strategic group operates is contestable by potential entrants, what restricts price strategies (Baumol et alii, 1982). Although there is not significant entry barriers in the slaughterhouse industry, there are switching barriers between both strategic groups, i. e., firms that belong to group 2 cannot enter without costs in the market exploited by firms belonging to group 1, as is the case of foreign market. These switching barriers result from market reputation (the process of building trust with importers and domestic cattle-raisers), mainly because of high technological level and sanitary levels Governance Structures Governance structures are the institutional arrangement that govern a transaction among agents, having two polar cases: spot market and vertical integration (hierarchy). The intermediary forms, such as long term contracts are known as hybrid forms (Williamson, 1996). In the case of Brazilian beef chain, there is a combination of distinct governance structures to govern the same transaction. More specifically, the same slaughterhouse raises its own cattle (backward vertical integration) and buys a significant portion of its supply in the spot market. In this case, it is adequate do distinct two types of relationship. In the first one,

5 cattle-raisers called de carteira 5 develop trust in the relationship, presenting regularity of quality 6. In the second type of relationship, cattle-raisers sell sporadically to the slaughterhouse, in a typical faceless transaction. This variety of governance structures is due to different levels of asset specificity, in accordance to final consumer requirements, and the presence of uncertainty in the supply market. In other words, backward vertical integration mitigates hazards associated to asset specificity and avoids a possible lack of supply. The clearest illustration of this argument is the use of own cattle (vertical integration) to supply the meat for Hilton Quota. Although this quota is not always defined by technical reasons, the greater profitability of Hilton Quota induces slaughterhouses to a greater concern about regularity and quality 7. Therefore, the greater the demand for confidence in the input (cattle), the greater the asset specificity, what requires some degree of vertical integration by slaughterhouses. The governance structures employed by the three firms analyzed are represented in Figure 1 below. Figure 1 Trader Domestic market Cattle-raiser Slaughterhouse International market Standard cut Cattle-raiser de caderneta International market Custom cut Vertical integration (with or without bones) International market Hilton Quota Market segmentation is a current strategy in the European market, with increasing importance in end of century. Generally, there are standard cuts, such as Italian and German Rump and Loins, the specific cuts for a client, like partition cuts and cuts for the Hilton Quota (physical specificity). The partition cuts are custom made, in accordance to agreed 5 Meaning, part of a stable portfolio. 6 What is different from good quality.

6 requirements demanded by European retailers and restaurants. This type of cut has increased as a result of raise in European labor wages in the last twenty years. They have greater transaction costs than standard cuts, because it is necessary more effort in negotiation to meet customer requirements and parts are subject to transaction hazards. The commercialization of standard cuts relies only order confirmation, whereas custom cuts require the agreement regarding specifications and samples. In both segments standard and custom, the meat can have a traceability system or not. The same importer may buy both types of meat, depending on final consumer requests, being traceability generally desired in top cuts. The cuts with traceability received a premium, contractually defined by different prices and/or a deliver delay. 2. FOOD SAFETY AND BRAZILIAN EXPORTS Food safety, a quality dimension of meat, is directly related to the absence of pathogenic microorganisms and chemical traces that may harm human health. Here relies the importance of beef chain quality control, traceability, sanitary control, regulation of the use of medicaments and other drugs, among other collective actions. Some aspects of food safety share the characteristics of credence good, i. e., they are not observed even after consumption. A contamination of BSE is an example because the disease may take several years to show up (Caswel e Mojduszka, 1996). According to Barzel (1982), the costs of measuring relevant information are a major cause of transaction costs. Some product attributes are easily measured, like weight and color, not implying significant transaction costs. However, some attributes are difficult or impossible to measure, requiring additional and costly arrangements in order to transmit this relevant information. Without any additional mechanism, there will be information 7 In this case, the concern about quality is mainly due to the more specific requirements in comparison to other markets.

7 asymmetry between parts, what may be associated to agency or adverse selection problems. Therefore, contractual safeguards, warranties, certification and traceability are trade mechanisms design to deal with problems derived from the presence of credence attributes and the consequent information asymmetry. Some of these credence attributes, related to health and food safety, has received increasing attention by consumers, particularly in EU. As a consequence, the competitiveness of a meat exporter depends heavily on its capacity to provide the relevant information in a credible way, with, for instance, an adequate traceability system. Terms like healthy, organic, non-gmo are increasingly important. In order to provide this characteristics it is necessary to use specific tool, such as traceability (Rabobank, 1998; Holleran et al., 1999). Machado Filho and Neves (apud Diesel W.R., 1998) establish a preference ranking of European consumer for food attributes, sorted in a descendent way: healthy products (importance of product certification and identification), absence of toxic elements, natural, high presence of minerals and vitamins, nutrition and low price. This ranking is substantially different from the Brazilian case, where the main attribute is low price, except for some small market niches for high standard meat. The European consumer concern is largely associated to serious food safety problems in the 90 s. Among them, the one that affects most the beef chain is the BSE. The BSE crisis began in 1996, when researchers established the connection between the BSE in animals and a variation of CJD (Creutzfeldt-Jakob Disease) in human beings. In order to eradicate this disease, avoid its spread and guarantee a safer product to consumers, EU authorities have demanded a traceability system to all meat traded in its jurisdiction. The imposition of this new trade barrier affects directly countries that have in EU a major export destination. In the case of Brazil, this new trade barrier is particularly important because EU accounts for more than half of Brazilian meat exports. Sanitary trade barriers

8 make it difficult for Brazilian firms to reach potential markets, such as China, Japan or Korea, that are increasing their meat imports. For instance, in 1999, EU was responsible for 60,83% of Brazilian non-processed meat exports (ABIEC, 2000), what puts the traceability issue in the spotlight. Besides sanitary barriers, Brazilian exports are limited by other trade restrictions, such as Hilton Quota, in which Brazilian share (5 thousands ton/year) is small in comparison with other Mercosul countries, like Argentina (28 thousands ton/year). 3. THE CONCEPT OF TRACEABILITY 3.1. Dimensions and Typology of Traceability Several researchers take traceability as quality control tool of a production system (Juran, 1974; Feigenbaum, 1994; Moe, 1998). The main features of that system (continuous production flow, batch production, custom production) define the basic unit of traceability, being it flow identification, batch identification, single product, date or serial number code. A traceability system that meets the requirements of quality control can have different levels of complexity, ranging from a single information to several data about the basic unit of traceability, describing the production process in detail. The determination of a specific level of complexity in a traceability system depends on an essential variable: the costs of implementing and operating the system. Other important feature of a traceability system is the range of its application: the traceability in the entire productive chain or the traceability internal to an organization belonging to a stage of the productive chain. In the case of a traceability system throughout the productive chain, there are two distinct ways of managing information: (i) each stage of the productive chain stores the relevant information about the process under its responsibility, whereas the product has just an identification; (ii) the relevant information is attached to the product in its path through the productive chain. This type of

9 traceability is adopted when consumers demand a specific information, that is used for legal purposes or product differentiation strategy (Moe, 1998). Whereas the automotive and aircraft industries have been using for decades advanced and detailed traceability systems, food industry generally uses less complex tools. However, with the increasing use of ISO 9000 certification and Good Manufacturing Practices in food industry, the traceability system is becoming more complex, taking into account more information about more stages of the production chain. Events like the BSE crisis and the debate about genetically modified organisms, besides its role increasing consumer concern about food safety, have contributed to a greater attention towards a systemic approach to traceability. In other words, there is a trend to attach information about the relevant stages of the production chain to the product. This general trend has been particularly strong in the beef chain case. Until now, the actual system in use in Brazil is quite simple in comparison with other economic sectors, aiming to meet the requirements of European regulations CE 820/97 and 1141/97. The size of the basic unit of traceability in this chain, as stressed by Moe (1998), varies according to the regulations, which does not yet have a standard. In addition, the basic unit varies with some features of the industry structure of each country, such as geographic dispersion, marketing channels, degree of cattle-raisers organization, monitoring of sanitary and fiscal obligations. For instance, in the United Kingdom, the traceability system that has been implemented may have as basic unit a single animal, whereas in Brazil the basic unit is a batch of animals with similar characteristics. According to the typology proposed by Jank (1999) for food industry, the Brazilian traceability system is partial, whereas the English approaches the perfectly traceable. The traceability system that has been used by exporter firms of Brazilian slaughterhouse industry is in accordance to the specification provisionally approved by the

10 EU Commission. The system presupposes the traceability of the following information: cattleraiser name and address; sanitary control number (SIF); country of birth, growing and slaughter; cut name; date of slaughtering, shelf life; traceability code (the same number as SIF), production date, batch number, sex and approximate age Definition Given all different dimensions of traceability presented in the literature and their variations, we adopted with the following definition. A traceability system, using or not information technology, allow for tracing information of different types (regarding production process, product and/or service) forward and/or backward from a stage of the production chain or a department of a firm. Traceability permits to have the product history, whose complexity depends on the purposes of the traceability system. These purposes may be a function of firm strategies and/or its institutional and competitive environment. 4. EFFECTS OF TRACEABILITY SYSTEM[DEP1] The evaluation of the effect of a traceability system on the Brazilian slaughterhouse industry may take into account three different aspects. The first point is the measurement costs of the product attributes. As mentioned in the section 2, credence and experience characteristics increase the costs of transmitting information because of the measurement difficulties. According to this idea, the traceability makes possible the transfer of the measurement costs from the consumer to other production chain segment. The premium-price of the meat with traceability code or the discount price when the meat does not have the code represents the transferred costs. In the beef case, the hygiene and hormone information cannot be verified neither after the consumption (credence attributes), what makes costly the

11 measurement of this information by the consumer. In the absence of a traceability system, there are not incentives for the sellers to carry out a more rigorous quality control. The second evidence refers to a new switching barrier between the strategic groups described in the section 1.1. Although the firms made few modifications to adopt the batch traceability system, the difficulties faced by the new slaughterhouses to begin to export are greater. This barrier can get worse if the system requires information that involve cattleraisers or it moves to an individual animal identification. The third point refers to the main assumption of the study a traceability system that requires information transmission throughout the chain can induce governance structures that permit a better transaction control. In different countries, food safety legislation has encouraged these arrangements (Loader e Hobbs, 1999). One of the possible causes refers to the fact that this kind of structure can reduce the informational asymmetry, and consequently, the transaction costs. However, the Brazilian traceability system currently in use has not induced modifications in chain organizational structures. This occurs because slaughterhouses could easily obtain the information required by the system. The batch identification already exists in the transport document that accompanies the animals from the farm to the slaughterhouse. During the slaughterhouse process, the batch control already existed, mainly in the firms that are used to pay the animal based on the dead weight. An additional control implemented for the traceability system was the batch control in the deboning room, what required training and people adaptation time. Governance structures that make possible closer relation between the agents can be necessary if would be required specific information about the production stages (caw-calf operator, stocker operator, feedlot operator), or if would be necessary an individual animal identification system. To depend on the information supplied by the farmers, as well as the

12 costs to verify and monitor the information truthfulness, can induce a closer relationship in order to reduce the transaction costs. 5. CONCLUSION The batch traceability system currently adopted by the Brazilian export slaughterhouses aims to be in accordance to the CE 820/97 e 1141/97 requirements, which were motivated by the BSE crisis. This is one of the ways to reduce market failures caused by the information asymmetry, as well as it makes possible the transfer of the measurement costs of quality attributes (experience and credence attributes) from the consumer to other chain stage. The adoption of the batch traceability system induced few or none modifications in the governance structures adopted by the slaughterhouses. This occurs because slaughterhouses can acquire the required information by animal batches. This situation can be different if the traceability system includes detailed information from the production stages or requires the individual animal traceability. As the batch system is provisional, further requirements may be demanded in the near future, what may induce changes in the governance structure. Actually, it is unclear if the current traceability system is enough to provide the information and control of the production chain, as the BSE crisis seemed to require. The beef chain will probably have to adopt a more complex system, which includes, for instance, information about animal feeding. In this case, slaughterhouses will need to control backward transactions, what may alter the efficient governance structure. REFERENCES Estatísticas publicadas pela ABIEC, The world beef industry. Rabobank international. Food and Agribusiness Research. January, 1998.

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14 LOADER, R. & HOBBS, J.E. Strategic responses to food safety legislation. Food Policy, 24, p MOE, T. Perspectives on traceability in food manufacture PORTER, M.E. Vantagem competitiva. 512 p WILLIAMSON, O E. Transaction cost economics. In Richard Schmalensee and Robert Willig. Handbook of Industrial Organization, v.1, p Mechanisms of Governance - New York: Oxford University Press, 1996.

15 Página: 10 [DEP1] Acho que esta seção deve ser reescrita (se você quiser, posso escrever). O problema é que tornou-se uma discussão teórica e não uma análise dos impactos da rastreabilidade sobre o setor. Pontos interessantes: transferência do custo de mensuração (tratado na seção, mas de modo muito longo), aumento das barreiras de mobilidade, considerações sobre o modelo fraco de rastreabilidade adotado.