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The Relationship of Orange Growers and Fruit Juice Industry:

An Overview of Brazil
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Prof. Marcos Fava Neves
Faculdade de Economia, Administrao e Contabilidade
(School of Economics, Business and Accounting)
University of So Paulo - Brazil


ABSTRACT

The article discusses the orange juice chain, using the theoretical background of the supply chain
management in a transaction cost economic approach (for more information, see Zylberstajn,
1995; Williamson, 1985; Zuurbier, 1996). The goal of the research is to discuss the chain
transactions, mainly between fruit growers and processing industry.

Key Words: Agribusiness, Agri-Food Business, Contracts, Orange Juice Chain, Toll
Processing.

1 - INTRODUCTION AND OBJECTIVES

The article discusses the orange juice chain, using the background of supply chain management
in a transaction cost economic approach (for more information, see Zylberstajn, 1995;
Williamson, 1985; Zuurbier, 1996), with an emphasis over Brazil, the worlds major juice
producer.

The following figure shows the simplified model of the orange juice chain. The goal of the
research is to make an analysis of the transaction between fruit growers and the processing
industry, in Brazil. It is a conflicting relationship involving high transaction costs for the chain.
There are several forms in which transactions take place between the industry and the suppliers:
vertical integration, types of special contracts, alliances (joint-ventures) and market. These will
be reviewed through this research, and will be supported by the results of 20 interviews with the
agents related to the transaction.



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Citar como: NEVES, M.F. The Relationship of Orange Growers and Fruit J uice
I ndustry: An Overview of Brazil - Journal for the Fruit Processing and Juice Producing
European and Overseas Industry (Fruit Processing/Flussiges Obst), Volume 09, Number
04, Schnborn, Germany, April 1999, p. 121-124.

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2 - THE BUSINESS ENVIRONMENT

The world-wide market for commercial fruit juices is growing very fast. Almost ten billion
gallons were consumed in 1995, resulting in a market of more than US$ 35 billion in sales. By
the year 2000 an increase of 25% in these numbers is expected (Tillotson, 1997). This
expectations are motivated by changes in geographic variables, mainly the urbanisation of the
population, demographic variables, as elderly populations, better incomes, better scholarship
levels and woman working outside, psychological and behavioural variables, mainly natural,
healthy lifestyle, benefits, convenience and others, which fit very well in the juice consumption.

In the orange chain, the fruit - upon it has been grown - may flow to the fresh fruit market (either
to be consumed as the fruit itself or to be processed at home to have a fresh juice), or it may
follow to the industry. The processing industry is a very specific asset, because it is built and
able to process oranges only (even though pineapples and lemons - provided that machines are
subject to the necessary adaptation - may also be processed) and this industry has also high
reallocation costs (costs to change activity).

In this chain, size and scale are also a very huge competitive advantage. For the last three years,
the industrial segment has been subject to a restructuring process, with some acquisitions and
mergers taking place in Brazil. One of the main competitive advantages to industries is to have
the bulk transportation, where special tank trucks pick up the juice at the industries in the State
of So Paulo, take it to private terminals at Port of Santos, ship it inside private special bulk
tanker ships, and take it up to private facilities situated at the main European ports, e.g.
Rotterdam, Antwerp and Hamburg. To have all this structure, the companies must be large
(with enough volume), or have strategic alliances.

There is a strong trend of the Brazilian industrial sector towards buying industrial units in Florida
(the USAs main producing state). Citrosuco, which has bought Alcoma, in Lake Wales
(Florida) for US$ 45 million, Cutrale (which has bought Coca-Cola juice companies, in
Auburndale and Leesburg) and also multinationals, as Cargill (which has bought units in
Frostproof and LaBelle Florida) Louis Dreyfuss (which has bought Winter Garden) have also
purchased companies in Florida (Power, 1997; FDC, 1997).

Figure: The Orange Juice Simplified Chain
Souce: author Transaction
SUPPLY
ORANGE
FARM
FCOJ
INDUSTRY
BEVERAGE
INDUSTRY
RETAILERS CONSUM.
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The main motivations to these four groups which hold over 70/75% of the market share in Brazil
and 30/35% of the market share in Florida are listed by Lesser (1997), as a means of building
more critical mass in the market place, heightening their buying and selling power (they can buy
from a larger number of orange growers) and to have more conditions to set price leadership to
sell the FCOJ in the market.

The size of the U.S. market is also another encouragement, because it consumes more than
40% of the world-wide orange juice, although having only 4.6% of the world population. This
will also allow these Brazilian companies to enter into more profitable not-from concentrate
(NFC) markets, which hold nearly 30% of the U.S. market.
The orange juice chain is very important for Brazilian agri-food business, representing more than
US$ 1,6 billion in exports every year. Brazil is more competitive in costs than the USA in
growing, pick and haul, and processing. The USA are more competitive in transportation and
distribution. The Brazilian FCOJ is subject to a high tariff to get into the U.S. market (more than
US$ 450/metric ton of FCOJ), and dealing with this tariff is another motivation for Brazilian
companies to enter into the North-American industry.

A trend shown by the industrial (processing) companies in the chain which is already found in
some Brazilian companies is the shift from the production-oriented philosophy to the market-
oriented philosophy, thus enhancing the chain coordination, having a better supply chain
management (relationship with fruit growers), and fitting the needs of the demand.

Also like the industry, the orange crop is an asset holding a very high specificity. Once the
investment decision is made, high installation costs are taken over, and the land will be used for
that production for at least 20 years. The product (orange) also has other specificities, mainly
the one which deals with time (it is a perishable product, and after harvesting, it has to be
processed fast because it starts loosing quality) and locational specificity (as fruits located far
from industries are subject to high transport costs). This makes citrus a very risky crop.


3 - CHAIN COORDINATION: THE TRANSACTIONS BETWEEN INDUSTRY
AND FRUIT SUPPLIERS

As seen before, efforts are being made in an attempt to provide the orange juice chain with a
better coordination. Looking back at the figure of the chain, efforts are done between the retail
and beverages industry, with the efficient consumer response (possible with technologies like
electronic data interchange) in order to reduce the transaction costs. Moreover, efforts are also
being made among the FCOJ industries and the beverages industry, in order to offer the
product which the beverages industry wants, with services and even initiatives towards
becoming associated in terms of risks and profits, further to trading data in an electronic way,
and thus enhancing the trust between the parties.

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However, in this chain, the transaction between the fruit growers and the FCOJ Industry still
requires a great amount of efforts to be done. This is the most conflicting relationship in the
orange juice chain. Several kinds of transactions arise, from market governance up to vertical
integration.











3.1 - Market Governance (Buying and Selling Fruits in Market Form)

In this form, fruit producers and industry make the transactions without any kind of contract.
Just before harvesting, they are looking for buyers. This kind of governance in the supply chain
does not prove to be efficient in the citrus industry. High asset specificities are involved,
particularly location (industrial units must be near the production farms because of high transport
costs), timing (the fruit must be processed fast, soon after harvesting, because it loses quality),
and physical (the fruit producing areas and industrial plants show high reallocation costs because
they are specific for the activity). This high asset specificity, that is involved with this transaction,
makes the market governance a very expensive and risky way of coordination in the supply
chain. In Brazil, this type of governance is irrelevant, with very small amounts purchased this
way.

3.2 Written Contracts

This coordination practice has been the most used in the supply chain. It allows both the
industry and the fruit producers to get specialised in their core competence, guaranteeing the
supply and demand. The first contracts written provided fixed prices for boxes (40.8kg) of
orange. From 1986, and up to 1993, the contracts provided varying prices for the boxes
according to the New York Exchange Markets. Each company had its own contract model.

In 1993, ABECITRUS (Brazilian Orange Juice Industry Association) has drafted a unique
contract to be used by all the producers and industry, but this has been prohibited by the
Brazilian Economic Defense Council (antitrust). These contracts are now arranged individually
between each industrial company and the fruit producers, and better quality, better location,
frequency, volume and trust result in preferential prices (supply chain concepts).

FRUIT GROWERS PROCESSING INDUSTRY
Market Governance
Written Contracts
Toll Processing
Vertical Integration.
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Currently, groups (pools of fruit growers) are emerging in order to perform a joint negotiation,
and achieve better prices and conditions, and also better coordination in all activities. The
contracts differ, providing several kinds of relationship, depending upon the distances, quality,
size (number of boxes), relationship with the industries and behavior in face of problematic
events. From a theoretical point of view, taking into consideration the asset specificity,
transaction costs, specialisation, core competence, this should be the most efficient governance
structure for this type of transaction in the chain.


3.3 - The Toll Processing

This kind of contract happens since 1980 in the orange juice chain. It is an alternative for
growers to rent the idle capacity of the industry and go further on in the chain, adding value to
the final product. According to this contract, fruit producers (growers) sell frozen concentrated
orange juice (FCOJ) to the beverage industry or distributors, instead of selling oranges to the
industry. So, they will play a role in the international market, taking over the risks of the
changing market prices for the juice (Neves, 1995).

The main advantages to the fruit growers were related to their advancement in the chain,
incorporating margins, reducing the dependence upon the industry supply contract, learning
about the processing activity, learning about the international market, enhancing the quality
control, and having a special relationship with the industry as well.

To the processing industries, the main advantages were the reduction in their idle capacity,
bringing higher supply warranties, having a better industry and the logistics/distribution process
planning, and finally, having a better relationship with fruit growers.

Usually, the industry, which rents its idle capacity to growers, is the agent for the sale of their
juice in the market. To know and deal within this market is a very high transaction cost activity
for fruit growers. In this relationship, quality is also stimulated, because prices per box
processed by the industry (charges, as a toll, normally US$ 1.00/box) vary depending upon the
industry productivity. The more production, better prices/box are received by the industry.
There are some risks in failing to monitor the industrial processing, and for this kind of contract,
producers have to spend money in monitoring the industry, particularly maintaining an industrial
engineer inside the industry during the processing period.

3.4 - Vertical Integration

The degree of vertical integration in the companies varies. There are industrial units with almost
50% of vertical integration towards the fruit supply needs, and others (most of them) with 15 to
20% and even smaller, as for instance the strategy of Dreyfuss. The advantages of vertical
integration to the processing units are:

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reduction of market dependence, and reduction of risks of not performing future contracts
with distributors and beverages industry;
attenuating opportunism;
economies of combined operations, stable relationships and information flow with internal
control from industry to farms;
shifting entry barriers;
facilitating the decision making process (reduction in risks of bounded rationality);
stimulation of other fruit producers to invest in orange production, following investments in
industrial units;
rationalisation of inventory levels, in a better industry planning;
orange production has proved to be an attractive investment in Brazil;
negotiation power in the chain.

The main disadvantages of vertical integration in the citrus industry, in this transaction between
fruit growers and industries, are:

high immobilisation of resources in land and buildings (high costs of land in the orange
production region - US$ 3 to 5,000/ha -, and also in the fruit production implementation);
higher risks in the agricultural activity of producing oranges;
higher barriers of mobility and exiting the business;
costs of monitoring a principal/agent relationship between the industry and farm managers
(bureaucratic and monitoring costs arise);
loss of specialisation;
diseconomies from unbalanced stages between the fruit production and industry;
high investments in machines and others.

The vertical integration is found in almost all companies. Cargill has two large producing farms,
Cambuhy used to hold nearly 80% of the fruit required (before the acquisition by Citrovita), and
the biggest companies have around 20% of own fruits. The four kinds of relationships, going
from market (insignificant) to vertical integration arise.

4 - CONCLUSIVE REMARKS

Four companies whose key activities are carried out in Brazil (two of them Brazilian owned
companies) started the concentration and globalisation process, by acquiring industrial units in
Florida. Other Brazilian companies are trying to follow this same path deemed of a fundamental
importance to assure their survival in this business in the future.

For this chain to be more competitive, in order to reduce costs, guarantee of supply, and have
more trust, the transaction between fruit growers and the industry still has to be better
coordinated. By reducing the vertical integration levels, the agents would make possible to
achieve the gains of specialisation (good and highly specialised fruit growers accrue better
results than the industrys producing farms in Brazil), and through the reduction in the capital
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investments for these industries in orange crops, they would be allowed to invest in building
better distribution/logistics process, distribution channels, and partnerships in the chain, and then
offering the product and services demanded by their consumers (beverages industry).

Long-term contracts between industry and fruit production, with education and trust, shared
risks and results, considering all by-products, providing a long term planning, and long term
results could turn this chain to be even more competitive.


5 - REFERENCES

FDC - Florida Department of Citrus - Florida - Brazil Processing Linkages - Economic and Market Research
Department - Working Papers Series 97-1, 38 pg.
LESSER, P.F., 1997 - The Globalisation of Florida Citrus - Florida Department of Citrus, Lakeland FL, 8 pg.
NEVES, M.F., 1995 - Sistema Agroindustrial Citricola: Um Exemplo de Quase Integrao no Agribusiness
Brasileiro.(Citrus Agri-Food Business: An Example of Quasi-Integration in Brazilian Agribusiness) -
Dissertao de Mestrado Apresentada FEA/USP, 116 pg. Presented at the University of So Paulo to
obtain the Masters in Business Management Degree.
POWER Jr., P., 1996 - Brazil Firm Purchases 2 Juice Plants - Business Finance - The Tampa Tribune, pg. 8
-10 26/09/96
TILLOTSON, J.E., 1997 - Marketing & Business Strategy - The American Fruit Juice Market: A Growth
Model - Fruit Processing 01/97 - pg. 24 - 30
WILLIAMSON, O.E., 1985 - The Economics Institutions of Capitalism - The Free Press, New York, 449 p.
ZUURBIER, P., 1996 - Market Structure and Vertical Coordination. - Proceedings of the Second
International Conference on Chain Management in Agri and Food Business- Department of
Management Studies - Wageningen Agricultural University, May 1996, pg. 307-322
ZYLBERZSTAJN, D. 1995 - Economia dos Custos de Transao: Conceitos e Aplicao ao Estudo do
Agribusiness - Associate Professorship Thesis submitted to FEA/USP, 237 pg. (Transaction Cost
Economics - Concepts and Applications to Agribusiness Studies - Post-PhD. Thesis, University of
So Paulo).