What are the potential benefits of traceability systems beyond consumer

willingness-to-pay

Eluned Jones

Texas A&M University

Eluned@tamu.edu

Protocols of industry management

1960 1970 1980 1990 2000

Total Quality ManagementJust-in-time Inventory Mgt

Efficient Consumer Response

Supply Chain Mgt

Channel and Category Mgt

ISO 9000ISO 14000

PC’s Internet

Where is the weakest link in the food ingredients supply chain?

Customer

Retailer/Service

Manufacturer

Processor

1st handler/elevator

Producer

Greatest potentialfor breakdown in Ensuring integrity

US Grain Infrastructure:number of grain handling facilities by state and export location

Location Number of Elevators by Storage Capacity (NASS, 2002)

< 1 million bu

(< 25,500 mt)

>= 1 million bu

(> 25,500 mt)

Illinois

Iowa

Kansas

Minnesota

Nebraska

Gulf Terminal

Atlantic Terminal

Pacific Northwest

Great Lakes

534

373

656

134

339

-

-

-

-

357

293

160

100

204

12

4

9

18

Total US off-farm storage capacity = 8.5 bill bu (215 mill mt)Total US on-farm storage capacity = 11 bill bu (285 mill mt)

Acc

oun

t fo

r 53

% o

f U

S o

n-fa

rm s

tora

ge c

apac

ity

Economic incentives in grains & oilseeds to segregate

• Extraction – science vs. art– Grain/oilseed condition – environment– Extraction yield– Starch, oil release– Rate of flow– Output quality – processing performance– Consistency in performance

• Known performance parameters– Risk reduction– Predict output, forecast & plan sales– Logistics planning – scheduling

• Supply Chain Management

CleaningCracking& Dehulling

Conditioning& Flaking

SolventExtraction

SolventRemoval

Toasting

Grinding& sizing

Soybeansfrom storage

Toasting& grinding

CrudeSB oil

Hulls

SBM44% protein

SBM48% protein

Process flow forCrushing SBUsing solvent extraction

Corn for Food and Industrial

• ~ 2 bill bu/annum• 76% - wet milling• 12% dry-milled alcohol• 11% dry milling and masa

• Wet milling: 5 components– Starch– Germ– Gluten– Fiber– Steep liquor

Differences in desired attributes•value in end-use •processing efficiencyRatio of allocation of storage

The coordinated/systems model

• Use of industrial and process engineering concepts

• Emphasis on logistics of physical product and information flow

• Considers costs of variability, chain reactions in supply flow

• Considers probability of non-desirable events occurring (risk of negative ROI)

• Considers culture, attitude, and behavioral influence

• Focus on (strategic) competitive advantage

Transparency

• Role of information in market efficiency – evolution of what constitutes ‘descriptive’ information and meets buyers definition of property rights.

• Evolution of public vs. private role in facilitating markets

Trust

Property rights

food ingredients

cognitive

emotional

‘Grey’ areas in transparency

Lack of transparency in:• Market structures – competitive vs.

coordinated (economic signals – price)• Institutional governance – role of public

(agencies) vs. private oversight• (understanding of) legal interpretation of

‘rights’ of the customer/buyer in the exchange relationship – source of trade policy conflict

Transparency:

• Disclosure of all rules, management practices relating to the production, processing and handling of food ingredients at each level of the supply chain up to the point of retail sale (store or service location)

• Imbues buyer at any point of exchange in the chain with a right to know about the property that is the subject of the transaction.

Key factors w.r.t. the motivations for implementing T&A protocols

1. Value/costs/customer• Economic signaling – what serves as a signal,

& how should the signal be interpreted– Customer (derived signal)– Government regulations (imposed signal)– Industry (generated signal)

• Costs of T&A protocols – allocation of the costs of implementation & maintenance– Short run variable costs– Fixed/overhead costs– Customer service– Market access– Costs of gaining competitive advantage –

strategic positioning investment– Risk/liability management

• Value (of T&A protocols) – How is this determined, and does this depend on

whether firm is buyer or seller?– Identification of cost-saving efficiencies (decreased

‘shrink’ loss)– Comparative advantage – geographic proximity– Competitive advantage – first mover– Brand/reputation – private label brands

• What is the likelihood that implementing T&A protocols highlights factors that were previously overlooked in the business relationship?

2. Risk and Liability – who assumes liability? What are the risks if T&A protocols are not in place?

• Potential loss of customers• Export market loss• Market access• Contract specification error• Recall• What if T&A protocols are in place and a

contamination event occurs (doesn’t meet contract specs, safety factor, biosecurity incursion)?

3. Influence of Firm/Corporate Structure• Organization

– Public or Private– Local/Regional/National/Multinational– Alliances with partners

• Upstream, downstream• Equity vs. non-equity

– Merged, acquired entities• Upstream, downstream

• Supply chain protocols in place/not in place• Information technology used for sharing

information (EDI)• Compatibility of computer/IT architecture

4. Location of responsibility: Public (Government) vs. Private (industry)

• At what level should there be regulation or oversight?

• What form should the oversight take?• Who should provide oversight? 3rd party,

autonomous industry or government?• Credibility? Accessibility, transparency,

internal/external audit, documentation

T&A as an investment

• Is the process control system adopted faster if there are prior investments?– (a) physical, i.e. hardware and software– (b) ‘soft’, i.e. training programs, human capital, and

quality management protocols

• What is the relationship of process control to regulatory inspection; HACCP, ISO, SQF, other?

• How is the value of process control related to other IT infrastructure in the firm?

• What would it take to initiate a process control system within the firm?

• Why did the firm invest? (where a T&A system is in place)

• What would motivate the firm to invest?

FollowRotationOf SB

30%Residue left onfield & soil test

Analyze Hybrid performance

Chemicalstorage

Seed Depth &spacing

Fertilizer & pesticide application

IPM-based Pest mgt

Combine settings

QualityGrain Mgt

Land

selectionFalltillage

Seed selection

Spring tillage seeding growing harvesting

On-farm handling & storage

delivery

PreviousGM crop

useNon-GMseed purity

Clean planterboxed

Pollendriftcheck

Cleancombines& trucks

QualityGrainSamplecheck

Clean conveyors

Dryers & bins

Non-GMsamplecheck

Basic production steps

Best production practices

Pts requiring SOP’s

Steps in ensuring integrity of farm level supply chain

Average Additional Production Costs ($/bu) for selected crops in Illinois

Value added crop Production costs

Harvesting & marketing costs

Total producer costs

Total handler costs

White food grade corn 0.03 0.46 0.49 0.15

Yellow food grade corn

0.40 1.21 1.61 0.11

Tofu soybeans 0.48 2.54 3.02 0.06

Non-gm soybeans 0.07 0.10 0.17 0.10

Source: Bender, Hill, Good (2000, 2001)

Farmers Coop, Iowa www.fccoop.com

Source verification divided into 9 areas:• Raw materials• Process control• Process verification – statistics• Finished product acceptability• Storage & shipping• Instrument accuracy and calibration• Personnel training• Plant programs (safety, etc)• Quality policies (mgt commitment)

Cost-Benefit Summary for QMS at a Farmers Cooperative Elevator, Iowa.

Operation Cost Savings ($)

Grading 1,085

Inventory Control 10,675

Operations efficiency 2,180

Regulatory compliance 5,300

Employee development 3,400

Total 22,640

Costs of QMS 11,250

Ratio 2:1

Source: Iowa State Univ. and Farmers Cooperative, 2002

QMS development

• General manager• Grain dept. manager• Regional grain superintendent• Elevator superintendent• Location manager• Elevator operator• Railcar mover operator• Truck scale, sampling, and grading operator• Grain accounting manager• Grain clerk• MIS Dept. Manager• Computer programmer

3rd Party Assurance -Global recognition (particularly EU, Mideast, Mexico, Japan)

• AOSCA – Assoc. of Official Seed Certification Agencies. State associations responded quickly to the market need for certification supporting export of niche grains and oilseeds in late 1990’s, e.g. tofu soybeans to Japan

• AIB – QSE- ISO 9000(2000) based:Farmers Cooperative Elevator Company, Farmland Industries, InnovaSure –Cargill, Inc.

• ISO certified: Colusa Elevator Company, Consolidated Grain and Barge, Inc.

• SQF – Safe Quality Food; protocols based on both HACCP and ISO

• USDA – GIPSA certification (ISO 9001 based)

GIPSA, 2002

“The program will provide verification services for grains, rice, pulses and products derived from these products. It will be designed for both export and domestic shipments. The process verification designation verifies the process not the final product. The full range of processes could be verified from seed purchase to final product on grocery shelves.”

AMS-USDA already provides similar process verification for fruits, vegetables and for livestock products (e.g. Premium Standard Farms pork products are certified under the AMS-USDA certification process

EU General Food Law Reg. EC No. 178/2002 Traceability defined as:“the ability to trace and follow a food, feed, food-producing

animal or substance intended to be or expected to be incorporated into a food or feed, through all stages of production, processing and distribution.”

The regulation further specifies under Article 18:“Food and feed business operators shall be able to identify any

person from whom they have been supplied with a food, a feed, a food-producing animal, or any substance intended to be, or expected to be, incorporated into a food or feed. To this end, such operators shall have in place systems and procedures which allow for this information to be made available to the competent authorities on demand.”

Trends of note associated with the grains and oilseeds sector:

• ConAgra divesting animal protein activities – strategic focus

• Cargill, DuPont new corporate “Centers of Expertise” with focus on SCM and product assurance

• Monsanto – consistent strategic activity despite market response (RR wheat)

• EU reaction to US petition to WTO• Antitrust concerns w.r.t. multinational M&A’s, and

to category mgt activity – implications for further coordination in the food supply chains.

• Intellectual Property protection – ADM vs. DuPont w.r.t. Solae new venture between DuPont and Bunge

Top Global Supermarket Companies Company Stores

ownedSales ($ bill.)

Countries of Operation

Wal-Mart Stores (US)

4,190 195.3 US, Puerto Rico, Canada, Mexico, UK, Germany, Argentina, Brazil, China, S. Korea

Carrefour (France)

8,926 55.3 France, Belgium, Czech Rep., Slovakia, Switzerland, Spain,Greece,Portugal, Turkey, Italy, Poland, Brazil, Argentina, Mexico, Colombia, Chile, Singapore, Indonesia, Japan, Taiwan, Malaysia, China, Thailand, S. Korea

Kroger (US) 2,354 49.0 US

Ahold(Netherlands

8,062 44.8 US, The Netherlands, Sweden, Norway, Denmark, Latvia, Lithuania, Estonia, Portugal, Spain, Czech Rep., Poland, Brazil, Argentina, Chile, Guatemala, Thailand, Malaysia

Metro (Germany)

2,169 40.1 Germany, Austria, Belgium,Bulgaria, China, Czech Rep., Denmark, France, UK, Greece, Hungary, Italy, Luxembourg, Morocco, Netherlands, Poland, Portugal, Romania, Slovakia, Spain, Switzerland, Turkey

Albertson’s 2,533 36.8 US

Tesco (UK) 907 32.4 UK, Ireland, Hungary, Poland, Czech Rep., Slovakia, Thailand, S. Korea, Taiwan

Safeway (US) 1,688 32.0 US, Canada

Rewe Zentrale (Germany)

11,788 31.9 Germany, Austria, Italy, France, Poland, Hungary, Czech Rep., Slovakia, Croatia, Romania, Ukraine, Bulgaria