What are the potential benefits of traceability systems beyond consumer willingness-to-pay

1. What are the potential benefits of traceability systems beyond consumer willingness-to-pay Eluned Jones Texas A&M University Eluned@tamu.edu

2. Protocols of industry management Total Quality Management Just-in-time Inventory Mgt Efficient Consumer Response Supply Chain Mgt Channel and Category Mgt ISO 9000 ISO 14000 1960 1970 1980 1990 2000 Internet PC’s

3. Where is the weakest link in the food ingredients supply chain? Customer Retailer/Service Manufacturer Processor 1st handler/elevator Greatest potential for breakdown in Ensuring integrity Producer

4. US Grain Infrastructure:number of grain handling facilities by state and export location Account for 53% of US on-farm storage capacity 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)

5. 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

6. Cleaning Cracking & Dehulling Hulls Soybeans from storage Toasting & grinding Conditioning & Flaking Crude SB oil SBM 44% protein Solvent Extraction Solvent Removal Toasting Process flow for Crushing SB Using solvent extraction SBM 48% protein Grinding & sizing

7. Corn for Food and Industrial • Differences in desired attributes • value in end-use • processing efficiency • Ratio of allocation • of storage • ~ 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

8. 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

9. 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

10. Trust cognitive food ingredients emotional Property rights

11. ‘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

12. 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.

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

14. 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

15. 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?

16. 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)?

17. 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

18. 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

19. 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?

20. Steps in ensuring integrity of farm level supply chain Chemical storage 30% Residue left on field & soil test Follow Rotation Of SB Analyze Hybrid performance Fertilizer & pesticide application Seed Depth & spacing IPM-based Pest mgt Combine settings Quality Grain Mgt On-farm handling & storage Seed selection Spring tillage Land selection Fall tillage seeding growing harvesting Clean conveyors Dryers & bins Pollen drift check Previous GM crop use Non-GM seed purity Quality Grain Sample check delivery Clean planter boxed Non-GM sample check Clean combines & trucks Basic production steps Best production practices Pts requiring SOP’s

21. Average Additional Production Costs ($/bu) for selected crops in Illinois Source: Bender, Hill, Good (2000, 2001)

22. 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)

23. Cost-Benefit Summary for QMS at a Farmers Cooperative Elevator, Iowa. Source: Iowa State Univ. and Farmers Cooperative, 2002

24. 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

25. 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)

26. 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

27. 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.”

28. 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

29. Top Global Supermarket Companies