1. Traceability, Assurance and Biosecurity in the (Global) Food System Eluned Jones, Texas A&M University DeeVon Bailey, Utah State University John Wiemers, USDA-APHIS David Anderson, Texas A&M University

2. Traceability, Assurance and Biosecurity in the (Global) Food System: cereals and oilseeds sector issues Eluned Jones Texas A&M University Eluned@tamu.edu

3. ‘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

4. Evolution in the past 2 decades: Science vs. art: food processing & manufacturing Evolution of technology with assoc. intellectual property rights eg seed genetics (formerly public good) JIT, TQM, ECR, SCM, CPFR in concert with SPC and evolution of IT (coordination/consolidation) Asset specificity as a source of differentiation Evolution of market economies & global food markets Increasing DPI: food convenience & entertainment Culture & consumer perception of ‘property rights’ Liability (due diligence), market access, market share Focus on core competencies as a means of increasing efficiency and effectiveness

5. Protocols of industry management 1960 1970 1980 19902000 Total Quality Management Just-in-time Inventory Mgt Efficient Consumer Response Supply Chain Mgt Channel and Category Mgt ISO 9000 ISO 14000 PC’s Internet

6. 1980 1990 2000 2010 Just-in-time Inventory Mgt Total Quality Management Efficient Consumer Response Supply Chain Mgt Channel and Category Mgt/Private Label Protocols of Strategic Industry Mgt Genetic Engineering – evolution of Life Science Companies Market introduction of GMO’s into food system Evolution of food product netchains Market introduction ??

7. 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 competitive advantage

8. Economic incentives in grains & oilseeds for supply chain coordination Focus on specific trait and maintaining integrity of the trait, e.g. high oil corn, food use SB’s, wheat variety with known milling/baking performance, cereals with functional attributes (health). –Less economic incentive in feed grains than in food use Known performance parameters - science vs. art –Risk reduction Grain/oilseed condition – environment Output quality – processing performance Consistency in performance –Predict output, forecast & plan sales Extraction yield Starch, oil release –Logistics planning – scheduling Rate of flow

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

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

11. Role of core competencies in locating opportunities for efficiency and effectiveness Implied threat of coordination – that producers must either engage in chain integration or diversify by incorporating downstream activities. Efficiency gains more probable when focus is on exploitation of existing core competencies

12. Antitrust Legislation: a help or a hindrance? Economic incentives for alternative governance structures –maintaining market share –gaining/retaining market access –decreasing information asymmetry –reducing transactions costs of discovering value of asset specificity and/or core competencies. Antitrust historically focused on barriers to entry as indication of market power Increased coordination within chain raises barriers to entry

13. Innovation and quasi-rents timeline Quasi-rents innovation exploitation Rival entry – erosion of market power

14. Mean % of producers surveyed contracting production Source: Bender and Good White food grade corn79 Yellow food grade corn38 Tofu SB63 Non-GM SB85

15. Contract specification - % of respondents VarietyProd. mgt Quality testing Delivery location On-farm storage White food grade corn 4636558273 Yellow food grade corn 8813508850 Tofu SB9347279333 Non-GM SB50 6310044 Source: Bender and Good

16. Average Additional Production Costs ($/bu) for selected crops in Illinois Value added cropProduction costs Harvesting & marketing costs Total producer costs Total handler costs White food grade corn0.030.460.490.15 Yellow food grade corn 0.401.211.610.11 Tofu soybeans0.482.543.020.06 Non-gm soybeans0.070.100.170.10 Source: Bender, Hill, Good (2000, 2001)

17. Cost-Benefit Summary for Quality Mgt System (QMS) at a Farmers Cooperative Elevator, IA. OperationCost Savings ($) Grading1,085 Inventory Control10,675 Operations efficiency2,180 Regulatory compliance5,300 Employee development3,400 Total22,640 Costs of QMS11,250 Ratio2:1 Source: Iowa State Univ. and Farmers Cooperative, 2002

18. Top Global Supermarket Companies CompanyStores owned Sales ($ bill.) Countries of Operation Wal-Mart Stores (US) 5,164244 Argentina, Brazil, Canada, China, Germany, Japan, Mexico, Singapore, S. Korea, UK, US, Vietnam Carrefour (France) 10,70465 Argentina, Belgium, Brazil, Chile, China, Colombia, Czech Rep., Dominican Rep., Egypt, France, Greece, Indonesia, Italy, Japan, Malaysia, Mexico, Oman, Poland, Portugal, Qatar, Romania, Singapore, Slovakia, S. Korea, Spain, Switzerland, Taiwan, Thailand, Tunisia, Turkey, US. Ahold (Netherlands 9,40759 Argentina, Brazil, Chile, Costa Rica, Czech Rep., Denmark, Ecuador, El Salvador, Estonia, Guatemala, Honduras, Indonesia, Latvia, Lithuania, Malaysia, Netherlands, Nicaragua, Norway, Paraguay, Peru, Poland, Portugal, Slovakia, Spain, Sweden, Thailand, US Kroger ( US) 3,66752 US Metro (Germany) 2,41149 Austria, Belgium,Bulgaria, China, Croatia, Czech Rep., Denmark, France, Germany, Greece, Hungary, India, Italy, Japan, Luxembourg, Morocco, Netherlands, Poland, Portugal, Romania, Russia, Slovakia, Spain, Switzerland, Turkey, UK, Ukraine, Vietnam Tesco (UK)2,29440 Czech Rep., Hungary, Ireland, Malaysia, Poland, Slovakia, S. Korea, Taiwan, Thailand, UK, US Costco (US)40038 Canada, Japan, Mexico, S. Korea, Taiwan, UK, US Albertsons (US) 1,68836 US Rewe Zentrale ( Germany) Germany, Austria, Italy, France, Poland, Hungary, Czech Rep., Slovakia, Croatia, Romania, Ukraine, Bulgaria

19. 1980 1990 2000 2010 BSE – peak epidemic ’92/93 Just-in-time Inventory Mgt Total Quality Management Efficient Consumer Response Supply Chain Mgt Channel and Category Mgt/ Private Label Protocols of Strategic Industry Mgt 4.5 mill cattle slaughtered in UK £2B vCJD identified since when 120 died BSE diagnosed in 2 cases: Germany, subsequently Spain, France, & all other EU except Luxembourg BSE identified in Japan Canadian death vCJD DIOXIN – Belgium – animal feed Tests reveal high levels thro’out poultry/egg SC

20. 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.”

21. Consumers and Public Risk Perceptions Decline in public trust in science has passed ‘threshold point’ where legitimacy of scientific judgement is questioned. Rise of the ‘consumer citizen’ and informed choice Diminished role of the ‘expert’ Wide availability of specialist information Broad shifts in national (international) political culture towards more transparent risk mgt practices Public risk perception driven by failure to provide information relevant to actual concerns of consumers Information based on technical risk assessments, ignoring key issues of public concern –Animal welfare –Uncertainty and unintended consequences –Animal feed and veterinary practices

22. EU consumer research summary: Regulation has been driven by rationalist interpretations of scientific evidence, which has encouraged elite groups to dismiss such public reactions as inappropriate and irrelevant. L. Frewer, U. of Wageningen Trust Property rights of market participants at all points along supply chain (netchain) food ingredients cognitive emotional

23. EU Actions w.r.t. Meat Quality and GMO’s DistributorAction relative to meatAction relative to GMOLabeling policy Auchan (F)GM free own brands, also propose to eliminate GM from additives Information provision to consumers Carrefour (F)TraceabilityGuaranteed by TTA, grain suppliers GM-free – Brazil Filiere Qualite Certificate Leclerc (F)TraceabilityGuaranteed by TTAMarque Repere Brand M & S (F)Removed all meat from animal feed with GM crops All own brands are GM free Asda/WalMart (UK) All beef or milk are free of GM based feed All own brands GM free. Link with Brazilian SB growers, UK distributors & labs to create a quality network Iceland (UK)All products are GM free since 1998. Investments to support farmers to develop environmentally responsible practices. Marks & Spencer (UK) Traceability on beef products sold under own brand. Will eliminate all animal products fed with GMO Eliminated all GM ingredients from own brandsLabels over 100 products containing GM derivatives Safeway (UK)Consortium with Sainsbury, Marks & Spencer and Northern Foods to eliminate GM feed Labels all own products containing GM ingredients Sainsbury (UK)Contract with Anglo Beef Producers – last 60 days no GM feed Eliminated all GM ingredients from own brand. Efforts to establish reliable sources of non-GM. Products not labeled Tesco (UK)Eliminated all animal products fed with GM feed Identifies products containing GM ingredients

24. Key factors w.r.t. the motivations for implementing T&A protocols 1.Value of T & A Protocols what serves as the economic signal how is value determined, and does this depend on whether firm is buyer or seller? Identification of costs saving efficiencies (decreased ‘shrink’ loss) Comparative advantage – geographic proximity Competitive advantage – first mover Brand/reputation – private label brands

25. 2.Costs of T&A protocols –Short run variable costs –Fixed/overhead costs –Customer service –Market access –Identification of cost saving efficiencies – Costs of gaining competitive advantage – strategic positioning investment –Risk/liability management

26. 3.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)?

27. 4.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 Information technology – information sharing (EDI) Compatibility of computer/IT architecture

28. Trends of note associated with the grains and oilseeds sector: ConAgra divesting animal protein activities – strategic focus Cargill, DuPont, John Deere new corporate “Centers of Expertise” with focus on SCM and product assurance EU reaction to US petition to WTO w.r.t. GMO’s, products of geographic indication (COOL?) Antitrust concerns w.r.t. multinational M&A’s, and to category management activity – implications for further coordination in the food supply chains (US Tobacco) – increasing interest in private labeling. Intellectual Property protection – ADM vs. DuPont w.r.t. Solae new venture between DuPont and Bunge

29. 3 rd 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 –United Fresh Fruit and Veg (UFFV) adoption of SQF USDA – GIPSA certification (ISO 9001 based) Food Marketing Institute (FMI) has purchased the IP rights of SQF, founder/developer Paul Ryan (Australian) moving to DC this month to head program.

30. 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? 3 rd party, autonomous industry or government? Credibility? Accessibility, transparency, internal/external audit, documentation

31. Role of Government Market regulation vs. oversight (restriction vs. enable) Product vs. process Institution (industry) vs. firm governance Sector or subsector vs. netchain e.g. 1990 UK Food Safety Act increased liability for safety of food products downstream (retail). Retail could be held liable for practices upstream. Alternative governance structures/organization protocols adopted to reduce risk exposure – process vs. product added as a coordinating mechanism.

32. Oversight: USDA-AMS & GIPSA Global and diverse sources of carbohydrate/starch, oils, gluten change competitive and comparative advantage – change role of economic signals previously supported by grades and standards. Recognition of more expansive role in facilitation lead to GIPSA’s process verification program conforming to ISO 9001 (USDA Certification) “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.” GIPSA, 2002

33. Public Role as Facilitator Institutional framework that generates economic signals reflecting both efficiency and effectiveness Redefine or clarification monopolistic competition (negative connotation) vs. (SR) ROI Support/generate awareness of contribution of core competencies across supply chain/netchain