UNIVERSIDADE DE SÃO PAULO
FACULDADE DE ECONOMIA, ADMINISTRAÇÃO E
CONTABILIDADE
DEPARTAMENTO DE ADMINISTRAÇÃO
SÉRIE DE WORKING PAPERS
WORKING PAPER Nº 00/010
COMPETITIVENESS OF MEAT AGRIBUSINESS CHAIN IN BRAZIL
AND EXTENSIONS FOR LATIN AMÉRICA
Decio Zylbersztajn
Cláudio A . Pinheiro Machado Filho
Este artigo pode ser obtido no site:
www.ead.fea.usp.br/wpapers/index.htm
Os comentários, críticas e sugestões devem ser enviados ao e-mail:
[email protected] e [email protected]
COMPETITIVENESS OF MEAT AGRIBUSINESS CHAIN IN
BRAZIL AND EXTENSIONS FOR LATIN AMÉRICA
Decio Zylbersztajn1
Cláudio A . Pinheiro Machado Filho2
PAPER PREPARED FOR THE GLOBALIZATION, PRODUCTION, SITING AND
COMPETITIVENESS OF LIVESTOCK PRODUCTION – CONFERENCE AND ROUND TABLE –
BRAUNSCHWEIG, GERMANY.
SEPTEMBER, 2000
The authors would like to thank Sergio Giovanetti Lazzarini and Ferenc Istvan Bankuti for
critical comments and support in collecting and organizing the data.
1
Professor, FEA/USP – School of Economics, Business and Accountancy, University of São Paulo – Brazil –
Head of PENSA (Agribusiness Program of University of São Paulo). – [email protected]
2
Phd Candidate – FEA/USP - School of Economics, Business and Accountancy, University of São Paulo –
Brazil – Member of the research group of PENSA (Agribusiness Program of University of São Paulo). –
[email protected]
1. INTRODUCTION
Traditional studies on competitiveness in agribusiness have been increasingly challenged
by non standard approaches. Traditional studies are defined as the ones based on
comparative costs and market participation of countries or industries. Since comparative
costs and market shares are frequently distorted by subsidies, specially for agricultural
products, traditional approaches frequently show inconsistent results. Following a
distinctive path, this study discusses competitiveness in a dynamic way, based on
comparative capacity of agribusiness chain coordination.
The approach is consistent with applied studies developed in different countries as it is
exemplified by Jank (1996), Farina (1998), Menard (1979). Zylbersztajn and Farina (2000),
for instance, have proposed that the concept of strictly coordinated agribusiness systems
can be useful to understand the organization, performance and stability of different and
rival systems.
Because it contrasts transaction costs and resource based theories to the traditional cost
based approach, this new concept braodens the traditional competitiveness analysis, based
on costs and industrial organization methods and in accordance with Porter’s approach. The
first allows the discussion of vertical coordination as a result of different governance
structures, suggesting that agribusiness systems can be analyzed as expanded sets of
contracts that go beyond the limits of the firms. The second allows the introduction of
dynamic elements related to the development of dynamic capabilities, which affects in a
differential way the evolution of routines and the production of specific knowledge.
Both approaches can be used to explain the capacity of firms, industries and agribusiness
chains, competing on different markets. Following Foss and Langlois (1998), the
transaction cost perspective and the resource based theory can be matched to help
understanding organizations deeply.
The present study is structured as follows: one introduction and four chapter. The second
chapter presents the methodology used. Chapter number three introduces the analysis of the
beef agribusiness system in Brazil, showing exploratory contrasts with other Latin
American southern cone countries. The fourth chapter explores the differential
competitiveness capacity, and by doing so, discusses the obstacles and factors that limit the
competitive capacity of different systems. Chapter five concludes and presents some
prospects for the future of cattle beef system of production in Brazil and the region.
2. METHODOLOGY
In order to study the competitive structure of the meat system in Brazil, this study followed
the methodology adopted by Farina and Zylbersztajn (1998), successfully applied to
different food systems in Brazil. The traditional studies are mostly based on methodologies
that do not make clear the specific aspects of coordination as a source of competitive
advantages. This study aims at reinforcing the relation between coordination and
competitiveness. The methodology follows four steps and can be described as follows.
Limits of the system: The first step in analyzing the systemic competitiveness is to define
the limits of the food system in focus. Since the vertical chain is very complex, representing
a flow of transformations that goes across country borders and connects agents with
different technologies, different societies and cultures, the need and importance of
coordination drastically increases, contrasting with traditional approaches. This definition is
also related to the level of aggregation to be adopted, varying from a very aggregated level
of a generic system to very focused vertical sub systems. These sub systems are defined by
vertical relations that link specific agents that adopt interconnected strategies. This case is
defined in the literature as a strictly coordinated sub-system (scss). In the case of superior
performance, scss might be reproduced by competitors, showing a pattern of diffusion until
it becomes the dominant model of vertical coordination (Zylbersztajn and Farina, op. cit.).
Sector Analysis: This is the second step of the methodology. At this step the industrial
organization study of each sector along the vertical chain is conducted. Different aspects
are considered here: the degree of concentration of industries, the existence of dominant
strategies, the existence of strategic groups and the dynamic adjustments regarding the
strategic positioning, and scale and scope of firms in the industry, among other aspects.
Analysis of Contracts: The third step adds a non standard analysis to the traditional study
of industrial organization, for which the focus is placed on the relations among the different
agents of different sectors participating in the chain. The theory of transaction cost
economics promotes the discussion at the very micro-analytical level, considering the
characteristics of the transactions in terms of frequency, asset specificity and risk.
Following Williamson( 1985), an efficient alignment of the governance mode and the
characteristics of the transactions are expected to exist. Sub optimal modes are expected to
be less efficient, adding transaction costs to the coordination. This approach has been
increasingly presented in the literature, as it can be seen in Menard (1979),
Zylbersztajn(1996), Sauvée(1998), among others.
Institutional Aspects: Performance of contracts is affected by the institutional
environment. The concept of institutions adopted in this study is based on North (1990),
who defines institutions as the rules of the game. Institutions are the legal systems and also
informal and semi-formal methods of delimiting the rights of individuals in any society.
Food systems are bounded by several types of limits imposed by societies, such as labeling
laws, consumer rights, restrictions on the use of technologies (GMO’s or hormones for
example), religious beliefs, among others.
Dynamic Aspects: Recent critiques of the transaction cost approach suggest that dynamic
aspects, introduced by the evolutionary economic approach, are useful and can be added to
the analysis. Langlois and Foss (1998) suggest to focus on the dynamic capabilities, which
are the result of internal and non transferable routines. These can explain the diversity of
governance forms, even when institutional and transaction characteristics are the same.
This concept is very important to this study, specially when the role of knowledge is
analyzed, in relation to specific purpose chain coordination.
The next two chapters will drive conclusions from a wide literature review, revisited under
the lenses of the methodology just described. In chapter three, the system is defined and
sectors are briefly analyzed. In chapter four, the vertical coordination is discussed, having
in sight the institutional analysis and dynamic aspects.
3 . THE BEEF AGRI-SYSTEM IN BRAZIL
3.1. Description and Definition of Limits:
Mercosur countries (Brazil, Argentina, Uruguay and Paraguay) are responsible for about
16% of the total beef production in the world. Brazil represents 60% of the block and
Argentina 20%, being the technological and organizational characteristics entirely different.
This chapter focuses on the characteristics of Brazilian beef agribusiness chain, which
presents, in a greater extent, a distinctive pattern of other countries of the block.
The present study focuses on the meat agribusiness system in Brazil, which includes a
variety of organizational and technological arrangements and actors. In reality, it is not
possible to consider just one single system operating in Brazil. FUNARBE (1999)
developed a study on competitiveness based in the definition of two sub systems.
Recently, although it is far from being an homogeneous trend for all participants or regions
in the country, some driving forces in the Brazilian institutional environment have reshaped
the beef chain. In Brazil, there can be observed the coexistence of high technological
standards of production side by side with very crude technologies. Diversity is the name of
the game, in which different standards have been observed in different regions.
In Brazil, the dimensions of this chain can be described in terms of its meat production.
Actually, the cattle herd is estimated in 157 million heads, supporting a meat production of
about 7,017 million tons yearly. That means a very low productivity of the heard in contrast
with other areas like Oceania (Anualpec 2000).
Table 3.1- Brazilian Cattle Herd by Region
Region
North
Northeast
Southeast
South
Center West
Total (Brazil)
1996
Brazilian Cattle Herd
1997
1998
1999
2000**
2001**
17.299.853 17.599.011 18.120.845 18.586.972 19.773.505 20.611.885
22.947.659 23.057.920 23.067.087 23.217.337 23.512.636 23.719.719
35.114.378 34.616.573 34.610.303 34.563.638 35.786.909 35.889.048
25.575.131 25.150.091 25.167.049 25.167.172 26.187.824 26.164.981
49.501.195 48.975.722 49.311.493 49.634.106 52.252.400 52.974.266
150.438.216 149.399.317 150.276.778 151.169.226 157.513.274 159.359.900
Source: FNP - Anualpec 2000
**estimates
Table 3.1 points to the relative importance of regions center west and southeast, being the
latter the most organized and coordinated. It is important to emphasize that the
technological standards are differentiated.
The availability of land and climate conditions within the country represent a great
comparative advantage for cattle raising. Nonetheless, there are several constraints for the
country to achieve real competitive advantages due to the lack of coordination and efficient
governance of the production chain.
Table 3.2 presents the per capita consumption of meat in Brazil. The per capita
consumption is of about 40,9 kg/year, against 30,4 kg/year of poultry and 12,3 kg/year of
pork.
Table 3.2 – Per Capita Beef, Pork and Poultry consumption in Brazil.
Types of meat
Beef
Pork
Poultry
Percapita Consumption in Brazil
(kg/inhab/year)*
Ano
1996
1997
1998
1999
42,8
39,2
38,5
36,9
10,6
9,6
9,7
10,7
22,2
24
26,3
29,1
2000
40,9
12,3
30,4
Source - FNP
The analysis of relative per capita consumption points to the importance of relative prices
and efficiency of poultry and pork production in Brazil. The gains in productivity of poultry
have been high enough to gain competitivenss and displace red meat from the consumers'
preferences. The per kilo price of poultry is lower than beef, causing it to be an important
source of protein for low income population.3
Figure 3.1 represents the key agents of the system, the predominant flow of product. The
arrows represent the existing transactions in the system. The institutional environment is
indicated by the box. It also reports some of the important laws and private organizations
that are part of the system.
Figure 3.1 - BEEF AGRICHAIN IN BRAZIL
3
FUNARBE(1999) presents the per capita consumption as being 22.85 kg per capita/year. This is the IBGE
(public statistical analysis bureau), which is very conservative, since does not count the informal market.
Other sources provide a more realistic figure. However the quality of information available still demands
further improvement
LE AT HER
Industry
E X T E RN A L
MA R K E T
Other channels
C
O
N
S
U
M
E
R
Input
R&D W IT H A
S Y S T E M IC
A P P RO A CH
BUN DLIN G
P roducers
R egional move
R edefinition os
production
systems
S cale economy
Slaughterhouses
C onsolidation
Logistical movem ent
S trategic groups
Wholesaler
Butchers
Superm arket threat
New concept diversity of products
Taylor made products.
S upermarkets
INS TIT UTION AL E NV IR ONM ENT
R egulation over meat market and fiscalization (M AA/DIP OA)
“Portaria 306”(packaged in the origin/slaughterhouses)
Incentives to strategic alliances ( “novilho precoce”)
S elf srrvice
B oxed beef
B randed products
T raceability (origin).
Based on the theoretical framework proposed in this paper, the analysis will focus on the
industrial organization of the segments and the transactions among them, limited by the
institutional environment.
3.2 – Main Segments
3.2.1 - The consumer
Consumption trends reflect new social needs of the local urban society. Issues as eating
food away from home, convenience, concerns with health and fitness, among others, are
changing the consumers eating habits worldwide, as well as in Latin American countries.
When considering Brazil, all of these trends appear, but not in an homogeneous way.
Recent market studies are reinforcing the high levels of income elasticity of demand for
meat (Hoffman,R.2000). Some specialists (Lazzarini Neto et alli, 1996, Saab M.S., 1998),
have shown that around 85% of Brazilian consumers are price driven and 15% are quality
driven. Saab (1999), when applying conjoint analysis with consumers in the State of São
Paulo, reinforced the importance of meat prices as the determinant key of consumers
choice, even in regions of higher income level.
The “price driven” segment takes its buying decisions considering firstly the relative prices
of the several cuts of beef and other meat products (chicken and pork mainly). The quality
driven market segment shows similar patterns, also observed in high income countries,
being primarily concerned with quality attributes (tenderness, taste, appearance,
convenience and food safety issues). As this market segment increases in size, the faster the
pressure for deep improvements in the agribusiness system gets, specially regarding
efficient coordinating arrangements. The issues that drive this segment are fairly the same
of the consumers from developed countries. Therefore, devices that allow traceability of
meat from the farm to supermarket are becoming important for the domestic market, in the
same way it is for the export sector.
3.2.2 - The Distribution System:
During the nineties, a wave of mergers and acquisitions could be observed in Brazilian
retail sector. Some of the major international players are present in Brazil, such as
Carrefour (France), Wal Mart (USA), Royal Ahold (The Netherlands) and Sonae
(Portugal). These players have entered on local market establishing joint ventures with
Brazilian companies or direct investments. This last strategy has been possible because the
local market is growing both in number of consumers and in income.
The top five supermarket chains in Brazil are presented in table 3.3.
Table 3.3 - Top five major supermarket chains in Brazil
Brazilian Major retailers – supermarket chains – Gross sales
Ranking.
1999
1998
1
2
3
4
1
2
3
4
Company
Carrefour (France)
Pão de Açúcar (Brazil)
Sonae (Portugal)
Bompreço S/A (Ahold Group) (Brazil/Holland)
Casas Sendas (Brazil)
Source – ABRAS - SuperHiper- May/2000
• * U$ 1.00 = R$1,80
Gross Income - 1999 (R$
Billion)*
7.9
7.76
2.85
2.64
2.38
This worldwide phenomenon is reflected in the beef agribusiness system. Although
traditional butchers and small retailers are still able to afford themselves at local level - they
can afford improving personal attendance and tailor made products -, they tend to be
replaced by large supermarket chains, especially in cities. Due to the leading role of
supermarkets and as a consequence of it, pressure from the top to bottom on the beef
agribusiness system is lowering the margins of processors, promoting strong modernisation
and increasing in scale of operations of the meat processing and distribution.
A major change in the institutional environment will further stress this trend. A new
legislation (“portaria 304”) enforces that the slaughterhouses must commercialise only prepacked and deboned meat to be delivered in cities with more than 200 thousand inhabitants.
The alternative way of distribution is very precarious, with sales of the whole carcass
associated to inefficient logistics, lack of sanitary and fiscal controls. Although well
designed for demanding consumers, this new legislation has not been fully enforced by
local government.
Large supermarket chains are important players in the new scss, designed and controlled by
supermarkets. The strategic alliances, still small in figures, can represent a new trend on
local markets.
3.2.3 – The Processing Industry
There are 274 slaughter houses in Brazil, being 14% scaled above 100 thousand herds/year,
21% between 50 and 100 thousand, 47% from 10 to 50 thousand and 18% smaller than 10
thousand. The regional distribution shows that the large-scale units are located
predominantly in the SouthEast and Center West regions. (FUNARBE,1999).
There are some important structural problems in this sector. The pattern of competition and
generalised practices of fiscal evasion have lead to a process of adverse selection, excluding
some companies from the sector. Some big players like Anglo, Swift, Kayowa, Sadia, and
others had left the beef chain or had, at least, reduced drastically their importance on the
market. This was due to the over scale of operations, logistic costs or distortions motivated
by inter-estate tariffs. Some companies, like SADIA for instance, have defined strategies
towards specialisation in poultry and pork production (under contracts), and have left red
production or even slaughter, preferring to obtain supplies by other means, when needed.
However, in the last few years, as a consequence of new legal pressures and the need to
improve technological standards, the sector had speeded up the modernisation process. As a
result of it, a wave of mergers and acquisitions took place.4
This strong restructuring process, which is leading toward concentration, is driven by
several facts:
-
Scale economies;
Financial difficulties;
Logistics (coordination of supply and distribution);
Technological and market impacts (mandatory debonning in the industrial plants).
As a result, this process of modernisation leads to two strategic groups motivated by either
cost leadership strategies or by value adding strategies. In spite of the incentives to
change, still the informal slaughterhouses appears to survive, being characterised by low
technology, non standard products, tax evasion practices and overall low quality.
The geographical reallocation is also taking place: the new units are moving towards the
inland areas in the Center West. Being closer to the cattle raising areas represents an
advantage, especially because of the new legal demands to cut and pre-pack the product.
Table 3.4. - Main characteristics of cost leadership and value adding strategic groups of
slaughter companies operating in Brazil.
Characteristics of market products
Products
Strategic efforts needed
Cost leadership
- Weak aspects for product
differentiation;
- Choice guided by prices;
- In some cases, orientation to
industrial
markets
(external/internal)
- Sales
of
carcasses
or
unbranded cuts.
- Scale economies.
- Low idle capacity.
- Efficient logistics (supply and
distribution).
- Process innovation.
Differentiation
- Smaller price elasticity of
demand.
- Value added products;
- Specific quality attributes.
- Traceability, certification and
standardisation.
- Packaged beef;
- Branded products
- Strictly co-ordinated subsystems (alliances) ;
- Market Segmentation;
- Product innovation
Source: Lazzarini – material presented at Pensa Agribusiness Course (CPA, 1998),
restructured by the authors.
The tables 3.5 and 3.6 show the Brazilian major beef exporters of both industrialised and
fresh cuts.
4
Among some major players, Friboi acquired Mouran, Independencia acquired Kaiowa, Frigovira acquired
Gejota and Minerva acquired Limtor, to name but a few.
Table 3.5. - Main Slaughter exporters of beef (fresh cuts)
Ranking based on 1996 exports
Ranking
1
2
3
4
5
Company
Swift Armour S/A Ind. e Com.
Firgorífico Independência Ltda.
Frigorífico Gejota Ltda.
Frigorífico Bertin Ltda.
Friboi Alimentos Ltda.
1993
50.459
14.285
19.700
10.872
0
1994
33.928
21.772
20.951
25.729
0
1995
33.179
18.937
18.290
18.416
0
1996
29.820
27.416
25.860
16.245
13.157
Share
15,35%
14,11%
13,31%
8,36%
6,77%
Value = US$ thousand / FOB
Source: FNP/SECEX/DECEX
Table 3.6. – Main Slaughter exporters of industrialised beef
Ranking based on 1996 exports
Rank
Company
1
Frigorífico Bertin Ltda.
2
Sola S/A Inds. Alimentícias
3
Swift Armour S/A Ind e Com.
4
Anglo Alimentos S/A
5
Sadia Trading S/A – Exp. E imp.
1993
27.345
45.112
83.877
42.224
0
1994
48.425
40.563
49.172
60.961
20.790
1995
51.701
47.355
42.389
60.725
36.692
1996
50.209
40.395
36.834
36.012
26.275
Share
22,04%
17,73%
16,17%
15,81%
11,54%
Value = US$ thousand / FOB
Source: FNP/SECEX/DECEX
As shown in table 3.7. the main destination of Brazilian exports is Europe (United
Kingdom), specially for industrialised meat. The control of FMD would represent a
tremendous impact in terms of future prospects for Brazilian exports, mainly for fresh
meats.
Table 3.7 – Destination of Brazilian Beef exports
Countries
USA
United Kingdom
Pays Bas
Italy
1996
19.351
36.424
23.278
28.255
Brazilian Beef exports (1000 ton)
Main destinations
1997
1998
22.041
31.178
41.363
44.401
15.990
22.368
13.026
17.070
1999
47.108
63.005
32.543
22.552
Source: FNP/SECEX/DECEX
3.2.4 – Cattle Farming
The most important characteristic of cattle raising in Brazil is its technological diversity.
The north region, characterised by the tropical climate, represents 12.9% of total herd;
northeast, characterised by its semi-arid climate, had 13% of total; and, south region,
characterised by a more homogeneous technology associated with temperate climate, had
15.9% of total herd population. The two most important areas, the southeast and center
west, had respectively 23.1% and 35.1% of total herd.
The figures show not only the different degree of geographical distribution of the activity,
but also the very distinct predominant farming systems in each area. Basically, the
specialisation of producers in breeding (6 to 8 months), the first level growth (12 to 36
months), and the termination or second level of growth (6 to 8 months) can be observed.
High valued areas that are closer to the markets are specialised in the final steps of the
production process, being the more remote and lower valued areas the ones specialised in
extensive production of the first steps of the production process.
Another way in classifying Brazilian production is based on geographical regions. Being
far more important than just a denomination of origin, this classification has to do with
technology of production. Whereas in the center west and south the cattle circuits are better
organised, in the north and northeast technological and organisational conditions are more
precarious. The FMD control program that has made the center – west and south circuits
internationally known as FMD free circuits in the year 2000, has played the incentive for
this denomination.
The different production systems can be defined in terms of the productivity of the herd,
with strong incentives to shorten the age of slaughter. The rate of birth is 60% in traditional
areas and is being improved to 70%. The age of the female first reproduction is 4 in
traditional areas and around 3 years old in areas with improved technology. The average
slaughter age was 42-48 months, being reduced to 32-40 months old (USDA). This
improvement has had significant impacts on the profitability of the cattle farming activity,
besides the fact that it is being followed by a significant improvement on the quality of
meat reaching the market.
According to the USDA report mentioned, the main features of Brazilian production factors
are:
a) The drop in slaughter age;
b) Availability of improved pastures and better pastures management (higher investments
by large breeders in center west region);
Another characteristic of Brazilian production is the system based on farms with extensive
areas, with natural or cropped pastures. The production based on feedlots is very tiny,
mainly located in Southeast states. This feature might represent an advantage to be explored
specially in international markets, following the trend of consumption of meat with low fat
from natural breeding. This has been used for a promotional campaign on Brazilian beef to
be played abroad.
3.2.5 – Farm Input Industry
The pharmaceutical-veterinary industry operates on a global scale, being also present in the
South American area. Brazil imports semen, embryos, and breeding stock from countries as
USA, Canada, European Community, Uruguay, and South Africa. The compound industry
is becoming more important as the technology improves. Although not so widespread as in
the poultry and pork chain, the concepts of bundling, meaning packages of products, and
services delivered to the farmers tend to increase.
Another feature of input industry is that the technology reached by crossbreeding programs
has been improved, mainly in Center-Western states. The industry artificial insemination
(AI) increased 20% in 1998, and now is expected to increase at a rate of 10% yearly.
4. – ANALYSIS OF VERTICAL COORDINATION
Given the availability of technology without relevant barriers to be accessed, capacity to
compete in the market place will depend on other factors, such as the institutional
environment (government), the private organisations, and mechanisms of governance built
by the agents.
In agreement with FUNARBE (1999), there are, at least, two types of co-ordination
mechanisms within the agribusiness system of meat in Brazil. However, to consider only
the diverse technological standards in explaining the differences in competitiveness is a
crude analytical reductionism. Another analytical mistake is to consider the definition of
the high technology sub system as being efficient or competitive and the low technology as
being less competitive. If so, why wouldn't the agents just skip to the more efficient? The
key aspect here is to consider the contrast between different products and different chains.
Low quality and high quality systems demand entirely distinct mechanisms of governance
as already stated by Sauvée (op. cit).
Moreover, the contrast between alternative organisational forms must be made considering
the feasible modes, being very naive, and the contrast or the design of unfeasible
prescriptions. This is the point of the present study, the point in which the low technology
sub system of meat in Brazil is considered very efficient, provided that it is organised to
supply low income and geographically dispersed consumers with no demands for quality
attributes. The high technology sub system, on the other hand, is efficient in delivering high
quality meat to consumers both at the local or international markets, with high standards of
quality that are aligned with strictly co-ordinated supply systems based on long term
contracts or reputation concerns.
Whether or not both systems will merge will depend on two basic factors. The first is the
conditions of technological tolerance. For instance, the poultry meat system in Brazil shows
low technological tolerance, since the systems that do not adopt the predominant standards
are to be ruled out from the market. This is not the same for meat or even dairy, where
highly diverse technologies can survive side by side. The second factor is entirely
dependent on the merging of consumers' tastes and income. This is expected to be a slow
process of change that is already in progress. Adding value to products through quality
means also the adding of costs, which will be seen in the final prices. Governmental
regulation on quality and food safety attributes, such as definition of mandatory standards,
might speed up the process.
4.1. Contractual Co-ordination:
The co-ordination mechanisms for the low technological sub system are the market/price
mechanism. The low quality standards and the non-existence of post contractual hazards
lead to the market solution. One does not expect long term contracts when agents can easily
supply his/her needs with a more efficient mechanism. The exhaustion of this governance
mode is related to the interference of demanding consumers placing value on quality
attributes, which are associated to highly specific investments for all agents along the
supply system, as HACCP methods and traceability systems, for example. Therefore,
farmers have to invest in high quality herd, industry has to improve the cool chain and
make specific investments in equipment, and the same is true for the distribution system.
Moreover, the post contractual hazards are very high for the high quality sub system,
implying in the design of governance mechanisms that protect the value of specific
investments.
To summarise the transactions' characteristics along the meat agribusiness system, see
tables 4.1 to 4.4. They show the transactions' characteristics of traditional low quality and
high quality sub systems. As stated before, the transformation of a system into another is a
complex movement that might take long time to happen, even causing a change of players.
TABLE 4.1. TRANSACTION RETAILER – FINAL CONSUMER
Low Quality Sub System
Meat as a commodity product
High Quality Sub System
Information about consumer
necessary
needs
is
Personal contact with butcher
Transaction with retailer
No Guarantees of Origin or Quality
Change in the institutional environment –
Price Driven Co-ordination. High price deboned and packaged meat
elasticity of demand.
Pressure for quality attributes of safety,
taste, and color in the long run. Studies show
still price driven mechanisms.
Wholesaler as a logistic alternative
Price co-ordination. Lower price elasticity of
demand.
The transaction with the consumer is placed largely at supermarket chains for the high
quality system, and local butchers or street markets for the low quality system. Quality
attributes are relatively less important than prices, even in high-income areas.
TABLE 4.2. TRANSACTION SLAUGHTERHOUSE – WHOLESALER/RETAILER
Low Quality Sub System
High Quality Sub System
No contacts with final consumers (no Information about consumer needs is
feedback)
necessary
Price Driven
Direct contact with retailer
Sale of Whole Carcasses
Presence of Broker
Impact of change in the institutional
environment – deboned
and packaged meat
Wholesaler
Pressure for quality
Wholesaler as a logistic alternative
Whereas in the case of low quality sub system the transaction is supported by very low
investments in specific assets, in the alternative system, the investment in cooling
equipment, packing and specially in the existence of trade marks is very high, representing
high level of asset specificity. Direct long-term relations between retailer and
slaughterhouse substitute the broker. Some large retailers, like Carrefour for example, have
a standard of backward integration towards own cattle farming and contract with
slaughterhouses.
TABLE 4.3. TRANSACTION CATTLE FARMER – SLAUGHTERHOUSE
Low Quality Sub System
High Quality Sub System
Cattle as a financial asset
Cattle as a production factor
Low information level
More information
Information asymmetry
Reduction in the margins
Few incentives for Quality/Productivity
Incentives for Quality (example: program of
“novilho precoce”) – Government
Informal market (tax evasion)
Competition with Informal Market Remains
a Major Problem
In the traditional low quality system, the cattle farmer, who is not specialised, adopts poor
management standards both at the technical and administrative levels. This farmer has no
incentives for quality improvement and pays no attention to the rates of return on the assets.
Generally, he/she considers the cattle as a cash maker and highly liquid asset. The high
quality farmer, on the contrary, invests in genetics, infrastructure and sees his/her activity
as highly specialised. He/she is concerned with the rates of return on investments and faces
strong bargaining conflicts with the slaughterhouses. Being price takers, the investments
expected to improve the quality of the final product are not recognised by the downstream
chain. Therefore, the discussion on value added technologies regarding the improvement of
quality does not necessarily imply immediate incentives for farmers.
Some large slaughterhouses, focused on high quality production, are partially backwards
vertically integrated. The reason has not only to do with risk of price fluctuation, but also to
tax evasion strategies. The most important incentive for cattle farmers to improve quality
attributes is the reduction of production length, leading to an increase in the annual
production. On the one hand, new technologies have shown good results, decreasing the
length of time of production and increasing the rates of return on investments; but, on the
other hand, these technologies have brought no price incentives for quality improvements.
TABLE 4.4. TRANSACTION INPUT INDUSTRY – PRODUCERS
Low Quality Sub System
High Quality Sub System
Higher level of services
No Services Added
Narrow vision of R&D
Commitment with producer’s economic
results
No orientation for benefit/cost analysis of
Growing concerns with
technology
distribution channels
logistics
and
The farm-input industry follows the same patterns of demand, which is related to the
different production systems. On the one hand, the sales of veterinary products are made
through local non-specialised dealers. No investments in semen or embryos are seen in the
low quality system. The industry of veterinary pharmaceutical products expects to move
towards more services added to the products, implying a new design of the distribution
chain.
More personal and long term contracts dealing with animal health care will evolve, on the
scale of high technology sub system grows.
4.2. Collective Efforts and Dynamic Capabilities
The efforts of chain co-ordination, regarding FMD control, quality improvement or design
of specific scss, can bring a new element to this analysis, which is named the development
of capabilities from the experience and learning by doing efforts. This type of capability is
non-transferable, cannot be traded, and needs to be locally developed and can introduce a
very sophisticated dynamic aspect to the co-ordination analysis. The efforts to eliminate the
FMD and organise the program “novilho precoce” can have other effects that might trigger
further competitive gains.
Marketing Alliance:
The appearance of quality driven scss relating cattle farmers, slaughterhouses and
supermarkets, has taken place. Several studies have focused on these new governance
arrangements, based on long term commitments (Perosa,1999). Results from the
development of efficient co-ordination mechanisms involving logistics and of production
technology (genetics, age, and non-adoption of hormones, among others) are still to be
harvested.
A group of supermarkets, slaughterhouses, and cattle farmers put some effort into the
production of high quality meat for niche markets. It is clear that the stability of such
arrangements will depend on the distribution of benefits and costs to the different agents in
the system. The creation of FUNDEPEC, a private/public organisation, was first moved by
the program to eliminate FMD. Efforts are showing good and bad results, but the
experience is teaching how to deal with co-ordination of a large and heterogeneous chain.
The marketing alliance can represent the seed for the increase and diffusion of new
organisational forms in the system. In 1997, only 4% of the consumption were related to
the scss of high quality system (novilho precoce) in Brazil (FUNARBE, op. cit.). The shortterm results are still to be further evaluated.
FMD Program: The elimination of FMD from Latin American countries has been
developed on a country basis. In Brazil, provided the dissimilarity between the production
areas, the program has been developed on a region base. Three areas (circuits) have been
defined, the North-Northeast, the South and the Southeast-Center West. The first is
characterised by its very low quality, showing no perspectives to eliminate the disease in
the near future. The second harvested relative success, but has shown a new focus of the
disease, after being considered free (with vaccination) from FMD. The same is going on
with the third area, where spots of the disease still appeared recently.
Two key lessons can be learned from the experience. First, to free the region from FMD
demands international organisation, replacing the local country based efforts. The
program must gather Argentina, Brazil, Uruguay, Bolivia and Paraguay together. This
represents an organisational effort much more complex than the recent experience shows.
Argentina, a country considered free from FMD, presented a new focus in 2000. The
example of USA and Mexico might be interesting to the region, since its success was due to
the single organisation mechanism.
The second lesson is that the learning process, related to organisation and co-ordination,
can be used to achieve other goals, for instance, quality improvement.
Role of Government:
The local governments are expected to provide public goods that involve the organisation
of the agency of sanitary control, sanitary inspection, and control of international and
national flows of products. In Brazil, there is a lot to be done regarding these aspects. For
instance, today the quality inspectors are paid by slaughterhouses, since there is a lack of
governmental funds for this purpose. The capture of agents is expected to emerge in such
cases, lowering the efficiency of the control mechanisms. Other examples are the provision
and enforcement of standards for different attributes of products.
A second demand on government is the enforcement of the new legislation on quality,
packing and deboning, which is a shortcut to motivate the players to adopt more developed
standards of quality.
A third demand on the government is the tax reform, which might remove distortions that
are affecting the agents in the meat system. At least, but not last, the continuous
investments in science and technology, in order to provide better conditions for the activity
in the future.
5 – FINAL CONCLUSIONS
As pointed out, the Brazilian meat agribusiness system is extremely heterogeneous and
strategically not well defined. The segmentation of the meat market towards more
sophisticated quality attributes represents a trend. The slaughterhouses are facing a
restructuring process, basically as a consequence of scale, logistics, financial problems, and
technological impacts (deboned in the processing plant). The producer is increasingly
driven by the production efficiency, since the margins tend to decrease and the input
industry changes its approach with its clients, broadening the knowledge of producers'
needs, adding services and transforming the distribution channels, as well.
The concept strictly co-ordinated sub system is helpful to understand the dynamics of some
specific contractual relationships along the chain. For instance, products designed for more
demanding markets, domestic or external, need new co-ordination tools. This is the case of
alliances among supermarket chains, some processors and producers to promote the sales of
meat with specific quality attributes.
Other important issue is the role of private and governmental agencies in the chain coordination, regarding sanitary problems and monitoring and promoting Brazilian beef as a
whole in the external market. Although it is not possible to foresee the real success of the
FMD control program, it represents a real example of how important are the effective coordinating mechanisms not only to implement but also to monitor a sanitary program in a
large area like Brazil and South American southern cone. This is a major challenge to
increase the regional competitiveness in a global economy.
Despite these basic aspects, which represent competitive disadvantages, there is the need to
create real competitive advantages. The control of FMD represents only the elimination of
a problem, being the real competitive advantage related to the dynamic capabilities created
in the process. The need to create co-ordination devices to attend the demands in terms of
quality, traceability, standardisation, certification are key elements to build dynamic
capabilities to the insertion of the region on the global beef market.
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