The compliance process of food quality standards on small farmers of citrus in Brazil[1]
Andréa Cristina Dörr[2], Maykell Leite da Costa[3], Aline Zulian[4], Marcos Alves dos Reys[5], Marivane Vestena Rossato[6]
Abstract
The coordination of the chain of citrus may be more effective when certified and non-certified producers make use of formal contracts in the marketing of their fruit.. The objective of this research is to economically analyze the traceability system and measures adopted by producers for the control of food safety in the citrus production chain of Caí Valley in the state of Rio Grande do Sul (RS), Brazil. In addition to that, this study also aims to examine the contractual relationships that have contributed so that small farmers participate in this market and meet its requirements. Forty-nine farmers have been randomly selected, among which, 24 are certified and members of a cooperative, and the other 25 farmers do not have certification. The primary data collection consisted of a semi-structured questionnaire for farmers with open questions for the cooperative and association. Regarding contracting, the cooperative showed more confidence in its transactions by having formal contracts between the institution and buyers. The association has built a great bond of trust with its main buyer, and that has led to the application of no formal contract with such buyer. Therefore, its trade relationship has increased instability and is more subject to market risks. Finally, producers without certification act individually in the market and are more subject to market uncertainties and risks, since they use only verbal contracts. It can be concluded that non-certified small producers are not excluded, but are subject to market fluctuations such as pricing and terms of negotiations, as well as access to less sophisticated marketing channels.
1. Introduction and Background
The increasing trend of fruit farming is the challenge of producing healthy high quality fruit. The international market in the face of new consumer trends demands safe food free from any harm to human health. Adopting specific programs that can ensure control and traceability of fresh fruit supply chains, in particular, has been a prominent fact in recent years in the market for perishable products.
The fruit sector is one of the most significant sectors of the Brazilian agribusiness. It extends to all Brazilian states, and its economic activity directly and indirectly involves about 5 million people. Brazil is the third largest producer of fruit, behind China and India, with an approximately 40-million-ton harvest per year. However, the Brazilian fruit production represents only 2 percent of fruit global trade, which means there is a high domestic consumption of fruit, turning Brazil into the 15th world biggest fruit exporter. Brazil is widely known for its traditional production of oranges and acknowledged as the world's biggest producer of orange juice (Anuário Gazeta, 2010).
The state of Rio Grande do Sul had an output of 343042 tons of orange, so it is the 5th biggest producer of oranges among all Brazilian states. Of this amount, only 22400 kg of oranges were exported. Rio Grande do Sul is the fourth largest exporter of oranges in Brazil, behind São Paulo, Santa Catarina, and Rio de Janeiro. It is the fourth largest producer of lime in Brazil, with a total of 25560 tonnes. This production is destined almost exclusively to the domestic market, since only 9000 kg are intended for foreign markets (Anuário Gazeta, 2010).
Because of recent international demand, certification schemes to prove product health and quality have been used, for instance for fresh fruit destined mainly to the European Union. The European market has become more demanding and stands out as the largest buyer of Brazilian fresh fruit. The international market requires several certification schemes for the entry of products, especially for fresh products, for instance and most importantly, organic certification and Fair Trade.
Certification became a key variable for grape and mango producers in São Francisco Valley in Brazil to reach European markets. Results show that certification brings advantages not only in relation to market opportunities, but also provides premium price (which is not often perceived by producers), organization of farm, safe and healthy products. Small farmers are not excluded from the market since they have the same opportunities of accessing and meeting the certification and traceability requirements. These producers also trade using the same forms of contract that mean producers use (Dorr, 2009).
Producers have basically two options for upgrading the chain: the cooperative and the Montenegrina Association. Thus, the citrus supply chain consists of a cooperative of 110 producers certified with Fairtrade, organic and Ecovida (Ecocitrus Cooperative), and an association of 20 non-certified producers (Montenegrina Association). In the region of Vale do Caí there are more than 4000 producers of fresh citrus working individually for middlemen. The fruit is destined to fruit sellers from that region, to wholesale businesses such as CEASA in Porto Alegre, and to other wholesale businesses in the Brazilian states of Santa Catarina, Paraná, and São Paulo. The citrus crop in this region occurs in the period from April to September. However, due to lack of appropriate infrastructure for refrigerated fruit storage in the farm, producers are subject to market fluctuations via supply and demand. Distribution logistics is inefficient for producers who are not members or not associated to the cooperative. The excess of supply forces the price to go down and producers do not decide the selling price. Thus, several factors contribute to the business vulnerability of non-certified citrus producers when negotiating with buyers. Negotiations are fast and conducted by the buyers, and are mainly based on informal contracts (verbal) and on the trusting of the parties. On the other hand, the cooperative and the association are responsible for the distribution and logistics of the production of their members. Only the cooperative uses formal contracts with their buyers. The Montenegrina Association uses informal contracts based on trust when trading with their buyers (agents know each other).
Working with contracts for producers and buyers of citrus is important because it ensures trading. Using formal contracts with fruit buyers (who usually are not end consumers), producers are more confident about the sale of your final product at a specified price, sometimes defined in the contract. This enables the producer to continue his activity because of a greater confidence in the positive outcome of their investment and dedication to the cultivation of fruit. Buyers of citrus, in turn, through formal contracts, have the assurance of product delivery and of meeting their end consumer needs. In addition, buyers can rely on the product they are buying, because they had already learned about it during the contract negotiation between the parties.Therefore, it is essential to identify how small producers of citrus react to meeting the certification requirements and verify if they are being excluded from the market due to any certification program. Thus, the overall objective of this research is to economically analyze the traceability system and measures adopted by producers for the control of food safety in the citrus production chain of Caí Valley in the state of Rio Grande do Sul (RS), Brazil. In addition to that, this study also aims to examine the contractual relationships that have contributed so that small farmers participate in this market and meet its requirements.
It is also important to consider whether small fruit producers are excluded from the market, in view of the increasing demand for certification and the deployment of a tracing system in the supply chain. It is also argued whether these producers can access the most sophisticated marketing channels and receive higher prices for certified production.
Based on the methodology proposed by Levy & Lemeshow (1999), the target population will be stratified into groups. The first group consists of certified producers from a cooperative located in Montenegro (municipality of the region of Vale do Caí, RS, Brazil). The second consists of producers that do not have the certification, and they can be inserted into an association or none in the region of Vale do Caí. Forty-nine farmers have been randomly selected, among which, 24 are certified and members of a cooperative, and the other 25 farmers do not have certification (however, eight of these producers are members of an association that does not use certification, and the others are not members of any organization). The primary data collection consisted of a semi-structured questionnaire for farmers with open questions for the cooperative and association. After being collected, data were managed and statistically analyzed. Other information was mainly used to compare certified and non-certified producers.
2. Theoretical background
2.1 Global Value chain: governance
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 & Schmitz, 2001:3).
The authors 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” (2001:4). Thus, the importance of governance is highlighted in the value chain using the following five reasons: (i) Market access: access of producers to new markets is limited to lead firms; (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 undermine government policy and (v) Funnel for technical assistance: to combine technical assistance to developing country producers with connectivity.
The determinants of governance presented by Humphrey & Schmitz (2000:6) are: arm’s length market relations (buyer and supplier do not define the product; no long term relationship and the buyers’ and producers’ risks are low); networks (the buyer and supplier define the product specifications together; the buyers’ risk is minimized because of the suppliers’ high level of competence); quasi-hierarchy (high degree of control from buyers over suppliers; the former define the product) and hierarchy (buyers control the supplier production process). The authors suggest that quasi-hierarchy is more likely to occur where global value chains frequently link producers in developing countries and retailers in developed countries. Similarly, Keesing & Lall (1992) argue 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 one. 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 which might be required to ensure that products and processes meet 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 to upgrade. Mostly buyers have a higher interest in suppliers according to their relationships.
Entering new export markets could be considered a major challenge for many firms in developing countries. New skills and knowledge are demanded, mainly related to bureaucratic procedures, national standards and procedures, marketing channels and consumers’ tastes. Upgrading could facilitate and promote competitiveness to access those markets.
The value chain literature focuses on the role of global buyers and chain governance in defining upgrading opportunities. Humphrey & Schmitz (2000) use the concept of upgrading to refer to three different shifts that firms might undertake. First, process upgrading: firms can upgrade either through transforming inputs into outputs more efficiently by re-organizing the production system or introducing superior technology; second, product upgrading: firms can upgrade by moving into more sophisticated product lines and third, functional upgrading: firms can upgrade by higher value added. Kaplinsky & Morris (2002) added a fourth case, intersectional upgrading: where firms can upgrade by moving out of a chain into a new one.
Upgrading occurs as a result of learning through the exporting experience, or as a result of the buyer promotion of the capabilities of developing countries producers, or of entering value chains with more demanding customers. The knowledge required for upgrading flows downstreams the chain supplied by customers (Humphrey & Schmitz, 2002:23). The three key elements of value chain analysis are economic rent, barriers to entry, and distribution.
3. Case study
3.1 Background to the contract
Around 4,000 families in the region of Vale do Caí has citrus as their main source of income. The sector creates jobs in the planting and harvesting, transportation of fruit, storage, in cooperatives and fruit processing industries. Moreover, the behavior of trade and service sector in the cities that comprise Vale do Caí is directly related to the period of harvests in the production of citrus. The main potentialities and advantages of this region are favorable soil and climate for the cultivation of citrus; possibility of selling tangerine to the domestic and international markets; closeness of marketing and consumption centers; good number of traders in the region; ease of cultivation and management of citrus; great amount of organic fertilizer of poultry and pork available in the region; experience in organic production of citrus and soil management with permanent vegetative cover on virtually all orchards. Moreover, it is based on family farming and it is very close to what one might call ecological and political correctness (Prefeitura Municipal de Montenegro-RS, 2011).
In the municipality of Montenegro-RS, which is part of the Regional Development Council (COREDES) Vale do Caí, concentrated more than 3 200 hectares acres of tangerine, with a production of about 39,000 tonnes of fruit (Madail et al. 2008). In this county there are about 1,300 citrus farmers, with an estimated production of 17,000 kg / ha, 11 producers of citrus trees, according to the website of the Municipality of Montenegro-RS (2011). Moreover, there are other tasks directly or indirectly related with the citrus industry that creates jobs and income for the region, such as: transport of fruit, packing house (about six in the city area) and three agribusinesses. Only a few citrus farmers are organized in Montenegro as members of a cooperative (Ecocitrus) or some association (Montenegrina Association).