The Dairy Supply Chain in Southern Brazil: Structure – Efficiency – Competitiveness

The dairy sector in developing countries and emerging economies such as Brazil, Uruguay, Argentina, India, Colombia among others represents a very important source of income for small family farms. Promoting the competitiveness of processing companies and consequently a market access for the small-scale family farms is important for the economy and the society in such contexts, especially in a rural development setting. In Brazil the dairy sector corresponds to 5,8% of the total value share in national agricultural GDP and 15% of animal production (IBGE, 2017). It also generates around 4.7 million employments. In 2014 1.3 million farms produced 35.17 billion litters of milk making it the fourth largest producer in the world. The total production has been increasing by 84% in the last 15 years. However, in Brazil, unlike other agricultural sectors that receive large incentives in technology investments, subsidized credit and governmental stocking composition support such as the soybean, meat and sugarcane for example, the dairy sector serves as a “shelter” for small-scale farms that are isolated from those high-tech and already highly concentrated value chains. As an example, 84% of the farms owned less than 50ha corresponding to 60% of the total production quantity and 45% produced less than 10 liters/day. The national productivity average is still under 2,000 liters/cow/day. Therefore, no serious competitive enhancement measures have been launched at national level regarding this supply chain so far. Moreover the low competitiveness of the national dairy industry can be largely attributed to the few investments and low professionalism in the chain, from farmers to processing companies. The processing companies have been struggling since the 1990s, when a late process of modernization of the supply chain started, in which institutional changes were implemented such as trade liberalization, deregulation of prices, imposition of public and private standards and the creation of the sub-regional trade bloc Mercosur (Chaddad and Jank, 2006). Those changes created a new environment where efficiency and innovation became the most important instruments of competition for retailers, processors, and farmers. In the same way, technological developments changed the distribution of fluid milk from small shops and bakeries to large supermarket retailers, whose relentless quest for cost cutting was passed on to the dairy processors (Escher, 2011a). An intense competition has then started against the solid dairy industry of other countries (only for the internal market) resulting in the bankruptcy of the less competitive processing companies and consequently the exclusion of thousands of farms from the market. Therefore this thesis proposes a deep analysis of the dairy sector in Southern Brazil in an attempt to answer the following questions: Why is the dairy sector, especially in the South, running behind the other sectors in the national agriculture in terms of competitiveness and modernization? What measures can be taken in order to upgrade it into a modern supply chain? How to do that while avoiding a high exclusion rate of farmers at the same time? The body of literature about these topics does not provide concrete answers to these issues, thus this thesis contributes to fill such gaps. It describes the organizational structures of the processing companies in the sector, especially the cooperatives, analyze the main determinants of their technical efficiencies and finally identifies the main restriction factors to competitiveness enhancement in Southern Brazil dairy supply chain, but also proposes a set of counterbalance strategies as levers for its competitiveness. It accomplishes such objective with the development of three essays on dairy processing companies in the region. The first essay brings a historical perspective on the evolution of the dairy cooperatives and their organizational structures in the ‘Mesorregião Grande Fronteira do Mercosul (GFM)’. Cooperatives have been the base of the dairy sector since it became a formal sector in Brazil and today they still represent the main connection to the market for the majority of producers in Southern Brazil, therefore their importance in the supply chain is high. The GFM is the country's largest dairy production area and one of the most promising and dynamic dairy production areas in the world. This region has the highest concentration of dairy cooperatives of small and medium-sized producers in the country. Nevertheless, the traditional policies and practices of Brazilian cooperatives no longer align with market realities and the exclusion of less efficient cooperatives from the market affects many small family farms. This study about the development of dairy cooperatives located in the GFM aims to identify these cooperatives' vulnerabilities and potential improvements that can increase their competitiveness. Using Cook’s (1995) life cycle approach, we describe the evolution of cooperatives in the dairy industry in this region. The results indicate the necessity of new designs for GFM dairy cooperatives’ business models and strategies in order to disconnect them from government aid. Measures to enhance their market competitiveness are necessary to promote self-sufficiency in this growing sector and maintain family farms’ continued existence. Based on this contextualization of the historical challenges faced by the dairy sector in Southern Brazil, specifically by cooperatives, we move on to the second essay where we measure the efficiency of processing companies in the state of Paraná in Southern Brazil. We use a set of factors identified in the previous study and in the literature as determinants of efficiency. Data from 243 milk processors including firm structure, management capacity, and organizational choice of dairies in Southern Brazil are analyzed. A production frontier is specified to estimate technical efficiency and identify its potential driving sources. An average efficiency of 77% indicates margin for a 23% increase in output, under ceteris paribus conditions. Economies of scale are also detected. The analysis reveals that the management capacity of companies is the main determinant of efficiency and that cooperatives are more efficient than investor owned firms. Idle capacities decrease the technical efficiency and should definitely be reduced. Based on the results, manifold managerial and political implications are derived. After the identification of the determinants of (in)efficiency of processing companies, we close this dissertation with the third essay, where we conduct an in-depth case study to better understand the results from the previous essays. To check in the field whether they are still valid, and how companies are dealing with the main challenges. As mentioned above, different from other sectors in the Brazilian agriculture, the dairy industry is still immature regarding liberal markets competition, and today faces difficult challenges. Thus this study-case returns to the GFM in Southern Brazil, to identify the main factors affecting the competitiveness in the dairy supply chain. By interviewing the main supply chain leaders we gathered information on their perception about the difficulties that the companies face in their attempts to become more competitive and the successful strategies already implemented to do so. We also attempted to confirm and further understand the main results of the previous chapters. For instance we asked directly about idle capacities and their causes, professionalism in the whole chain, government supporting actions, coordination between producers and processors, among others. Among the main factors retarding the modernization of this supply chain we found: Missing professionalism, formal agreements, investments in marketing and research, technology, development and innovation, technical assistance, high transport and transaction costs, idle capacities and frauds. This study also presents different strategies already implemented by some actors to overcome such barriers. It closes proposing possible solutions to be the target of managers and authorities in a sustainable common project of development for the benefit of whole chain.