Redesigning the Food Chain: Trade, Investment and Strategic Alliances in the Orange Juice Industry P

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Redesigning the Food Chain Trade, Investment and
Strategic Alliances in the Orange Juice
IndustryPaulo F. de AzevedoFabio R.
ChaddadIAMA SymposiumChicago, Illinois26
June 2005
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Introduction

• Background food industry internationalization
  strategies in light of economic integration
• Focus on Brazil and the U.S.
• Trade and FDI complements or substitutes?
• It is important to examine firm-level decision
  making and structure of particular industries
• Changes in trade and capital flows create
  opportunities for redesigning the food chain

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Food Industry Internationalization Strategies

• Export / Import
• Licensing
• Strategic Alliances
• FDI greenhouse or MA

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Food Industry Internationalization Strategies

• Brazil exports
• Soybean, Coffee, Sugar and Ethanol, Meats,
  Cotton, FV
• Large recipient of FDI
• MNEs 30 of food sales and 25 of agrifood
  exports
• FCOJ is the exception exports and FDI
• U.S. exports and FDI
• FDI in food manufacturing affiliates of U.S.
  firms reached US36 billion in 2000
• They generated sales of US94 billion in 2000,
  compared with US30 billion generated by
  processed food exports

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Brazil Growth in Agricultural Production(1990-20
04)
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Brazil Growth in Meat Production(1980-2004)
Million Metric Tons
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Brazil Agricultural Trade Balance (US
Billion)(1990-2003)
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U.S. Agricultural Trade Balance (1989-2003)
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Main Agricultural Exporters (2003)
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Foreign Direct Investment in Brazil (US Billion)
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Paper Objective

• The FCOJ industry provides an example of how
  changes in market integration provide incentives
  for foreign direct investment and the redesign of
  the food chain.

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Orange Juice Industry Structure

• Brazil (Sao Paulo) and the U.S. (Florida)
• 59 of worlds total supply of oranges
• U.S. 25
• Brazil 34
• 92 of worlds OJ output
• U.S. 45
• Brazil 47
• Global competitors in FCOJ market (intermediary
  products)
• U.S. 8-15
• Brazil 80-85

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Orange Juice Industry Structure Brazil

• Largest in volume
• 47 of worlds OJ production
• 2/3 orange production is used in OJ (US 2.6
  billion)
• 98 of OJ is exported (1.3 million tons)
• Competitiveness
• Low input cost (2 vs. 4/box)
• Economies of scale in crushing
• Large, capital and technology-intensive plants
• Bulk transportation system dedicated trucks,
  bulk terminal ports, tank farm vessels
• Dominance in global markets 85 of total
  international trade

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Orange Juice Industry Structure Brazil
Number of Processing Plants 26
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Orange Juice Industry Structure Brazil

• Tacit collusion likely
• High industry concentration
• Slow technological change
• FCOJ is homogeneous product
• Mature market
• But fierce competition for raw material and
  customers
• High fixed costs
• Excess capacity (17 plants are operational)
• Industry rivalry

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Orange Juice Industry Structure U.S.

• US 3.5 billion
• Fragmented 52 processing plants
• CR-4 34 (under estimated)
• Consolidated downstream
• Minute Made
• Tropicana
• Floridas Natural

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FCOJ Industry Structure U.S. (1997)
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Vertical Coordination

• Non-market vertical coordination mechanisms
• High temporal and site specificity
• U.S. (2002)
• 88 marketing contracts (pound solids)
• 7 vertical integration
• Trend toward less VI
• Brazil (2004)
• 2/3 marketing contracts (volume)
• 1/3 vertical integration
• Trend toward more VI

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FCOJ Economic Integration and Chain Redesign

• The U.S. is one of the most open economies in the
  world
• But agriculture remains an exception
• Low average tariff rates but protection of
  sensitive products
• Lump-sum tariffs
• TRQs
• Special safeguards
• SPS restrictions
• This protection directly affects some of Brazils
  main export products, including
• Sugar and Ethanol
• Meats
• FCOJ

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Comparative Tariff StructureMercosur, EU-15 and
US
World average tariff rate in agriculture is 62
(2001)
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U.S. Tariff Rate Quota Schedule for Imported
FCOJ(US/SSE)
Single Strength Equivalent corresponds to a
gallon at 11.8? Brix
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For the average 2002 FCOJ price, the specific
tariff rates for FCOJ and NFC were equivalent to
ad valorem tariff rates of 56.7 and 13.7
respectively.
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Orange Juice Effects on Trade and FDI

• Significant decrease in U.S. imports of FCOJ from
  Brazil since early 1990s
• Lack of market access TRQ system
• Other countries enjoy preferential tariff rates
• Self sufficiency orange production less
  vulnerable to freezes
• Consumption trend NFC juice
• Decline in Brazilian FCOJ exports to the US from
  US 460 million in 1989 to US 100 million in 2004

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FCOJ Exports from Brazil (Tons)(1980-2003)
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FCOJ Imports into the U.S. (US 1,000)
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Orange Juice Effects on Trade and FDI

• FDI (1990s)
• Cutrale acquired Minute Maid plants
• Citrosuco acquired Alcoma plant
• Cargill acquired Procter Gamble plant
• Coinbra acquired Winter Garden plant
• Motivations
• Get around trade barriers and have access to U.S.
  market
• Explore competencies in host country (Dunning
  effect)
• Leverage access to information/know how
• Ability to consolidate the industry
• Risk management strategy (price and production
  risk)

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Redesign of the U.S. Orange Juice Chain Before

• Fragmented
• Downstream vertical integration from producers
• Cooperatives (5)
• Producer-processors (11)
• Major firms were large, diversified food
  companies
• OJ is not core business
• Core competence marketing and branding
• Need reliable source of OJ
• Upstream vertical integration

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Redesign of the U.S. Orange Juice Chain Before
Retail Food Service
Food and Bever.
Orange Groves
Juice Process
Consu- mers
Ag. Inputs
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Redesign of the U.S. Orange Juice Chain
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Redesign of the U.S. Orange Juice Chain After

• More consolidated
• Vertical desintegration
• Specialization
• Processors in FCOJ/NFC
• Minute Made and Tropicana in consumer-ready
  products
• Strategic alliances to explore complementary
  capabilities
• Cutrale Minute Made (FCOJ)
• Citrosuco Tropicana (NFC)

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Conclusions

• Classic Dunning effect trade barriers foster
  FDI
• Trade barriers not sufficient condition for FDI
• Firm-level strategic decisions
• Competitive advantage
• Orange juice chain redesign
• Industry consolidation
• Vertical desintegration
• Alliances between OJ processors and beverage
  industry
• High and selective trade barriers for Brazils
  FCOJ in the U.S. have negative effects on
  Brazilian producers but not necessarily on
  processors