INTERNATIONAL FOOD & AGRIBUSINESS MANAGEMENT

ASSOCIATION
21TH ANNUAL WORLD SYMPOSIUM
“Navigating the Global Food System in a New Era”
Boston, MA, USA. June 19 - 22, 2010.

A STUDY ON THE TRANSACTION BETWEEN THE PRODUCER AND THE

COMMERCIALIZER OF BLUEBERRIES IN ARGENTINA. LIMITATIONS
OF THE BUSINESS SUSTAINABILITY

Proposal for Paper: Responsible Food Supply Networks

Authors: Alcover, Paulo A.1; Dulce, Evangelina G.; Guerrero, Carolina; Vilella,
Fernando.

Key Words: blueberries, commercialization, transaction, governance structures

1. Problem Statement
Blueberries establishments in Argentina are described as productions intensive in labor
and capital; they foster local and regional economies. Commercial plantation of this
crop is recent in this country, with the first export occurring in 1994; during the
following years a significant increase in the cultivated area was registered, a process
that had been boosted by greater demand and good export market prices. Currently, a
low profit is a result of the process of exclusion and expulsion of producers.

The blueberries business is a typical specialties business. It is a product highly

perishable and differentiated from the rest of the fruits for its manual processes,
preservation and destination. It requires a great high-risk and specialization initial
investment (approximately U$S20,000 to U$S40,000 per hectare, depending on the
technology applied and the selected area), as not choosing the right place or variety can
result in being out of the first fruit business or the best prices.

In Argentina appeared as a counter season fresh fruit export business. Argentina’s

ability to produce this fruit allowed it to be superbly positioned regarding price levels
and the chances of allocating the product. There is no local culture of consumption,
thus, unless it is allocated abroad fresh (export market, mainly the United States), it will
not find an alternative destination. Lately, the remainder or non-exported portion is
destined to the frozen or processed food industry, which pays very low rates; in some
cases, the producer does not harvest the rest of the fruit that remains in the plantation or
simply discards it.

This business is characterized by a high proportion of small-to-medium area (1 to 25

ha.) producers who, in general, sell their production on consignment to a
commercializing company, and by a few other great scale producers (more than 50 ha.)
that are vertically integrated with packaging and classification, and who can carry out

1
Corresponding author: Paulo Alejandro Alcover. Email: alcoverp@agro.uba.ar. Food and Agribusiness Program,
School of Agronomy, University of Buenos Aires, Argentina.
the commercialization independently. In the latter case, there is a financial differential
and greater market power at the moment of negotiating the sale. This integration
reaches the destination market dealer. In the former case, the producer does not know at
which final price the product will be sold neither when nor where.

International prices of blueberries in reference to the US began to decrease; as a result,

the prices perceived by producers were lower than the calculated at the moment of
investing, which considerably reduced the business profitability. This situation is
worsen given that it involves an activity with high import and export barriers, therefore,
agents find themselves trapped in it, with no other option than rethinking the business
and ending up selling a specialty in the market, that is, by its price. The alternative
paths of non-exported fresh fruit can be: retailer sale within the internal market (fruit
and vegetable stores), sale to industries (drying, freezing, pulp, juices and sweets),
and/or production loss. Along with this, the increase in labor value, the rise in
consumables prices and the bad climatic conditions in harvest during the last campaigns
have stressed the profitability loss. At the tax level, the VAT refund is another
restriction they weren’t expecting. The delay in the refund worsens the financial and
economic situation of the company, sometimes lasting even a year; whereas in Chile,
for example, refund is done between 7 and 15 days.2 We mustn’t disregard the
structural restrictions affecting the chain logistics. One of them is the capacity of
warehouses in airports, such as the case of Ezeiza, which found itself saturated in
production peaks. Other limiting factors are transportation (refrigerated trucks),
capacity of packing and refrigeration, and the conditions of routes and internal roads
that affect the product quality.

As a consequence of these events, many agents are excluded from the activity. One of
the key transactions in the Argentine blueberry business is the transaction at the
production-commercialization level, as it is the one in which the main conflict points
originate. Hence, the purpose of the paper is to study the production-commercialization
transaction, assessing the restrictions by which the blueberries business in Argentina
has been losing profitability and limiting the activity growth.

2. Procedures: Methodology and Theoretical Framework

The study is structured in two levels of analysis: a macro analysis (sectoral statistics
and institutional environment) and a micro analysis (transaction and governance
structures). Both analyses are based on secondary information sources (web pages,
SAGPyA3, SENASA4, CAPAB5, journals) and primary sources (semi-structured
interviews with producers, traders and chambers’ representatives). Given the interviews
with key sectoral agents, the main conflict points between production links and
commercial links were broached.

There was an exploratory stage during research, as we intended to develop, clarify

and/or modify concepts and ideas with the aim of outlining more precise problems or
plausible future hypotheses. Thus, the research was based upon qualitative matters and
practical applications (Gil, 1994).

2
Agr. Eng. Luciano Fiszman. Berry Procurement, Gourmet Trading Company. Personal Communication.
3
Secretariat for Agriculture, Livestock, Fisheries and Food.
4
The National Service for Agrifood Health and Quality.
5
Argentine Chamber of Blueberries and other Berries Producers.
The theoretical framework was set following the competitive systemic environment
analysis according to the Coasian paradigm, concerning transaction costs and
companies as contracts networks; North’s (1990) view of the relevance of institutional
changes in historical development processes; in property rights economics (Demzsetz,
1967); the theory of the firm and transaction costs (Williamson, 1985); and the theory of
agency (Arrow, 1963, 1968; Jensen & Meckling, 1976). Arrow (1969) defines the
transaction costs as the economy-running costs. Analyzing the economic system from
the contract theory’s point of view, transaction costs can been thought of as contractual
costs, the costs of negotiating, outlining, executing and rescinding contracts. According
to transaction costs economics (TCE), transaction is the basic unit of analysis, and
governance is an effort to create order with the aim of attenuating the conflict and
achieving mutual profits.

The main dimensions, with the purpose of describing transactions are: the frequency of
recurrences, the degree and kind of uncertainty to which they are subject (as well at the
organizational level, as at the institutional one), and the assets specificity. Even if all of
them are important, many of the refutable implications of transaction costs economics
critically approach the latter. Considering transaction as the unit of analysis, in view of
the transactions’ attributes –assets specificity, frequency and uncertainty– we can
identify and outline the governance structures alternatives –market, contract, firm– that
are more commonly designed and chosen in each chain interface in order to settle
transaction. Williamson defines governance structure as the institutional matrix in
which the integrity of the transaction is determined. In the framework of New
Institutional Economics, the institutional settlement among economic agents determines
the way all of them cooperate or compete with one another.

The frequency of a transaction is a dimension of its regularity. It represents one of the

attributes that predetermines the election of the governance structure. Besides, it settles
the knowledge degree that each part has of the other, if there are processes of trust
development that, as long as they are extended over time, enable credible commitments.
The recurring frequency of transactions, with the subsequent creation of reputation,
saves transaction costs.

Uncertainty is the ignorance about future events and it comprises, according to

Williamson (1996), three aspects: uncertainty linked to contingency, to the lack of
communication, and the one due to situations of behavior in interdependence relations.
Williamson’s suggestion that uncertainty can have its origins in behavior is considered
to be relevant when choosing the governance structure, as it is connected to the choice
of vertical integration. The uncertainty attribute is closely linked to the assumption of
rationality-limited behavior. The risk is related to uncertainty of behavior, due to
unfinished contracts associated with high asset specificity.

O. Williamson introduces the notion of assets specificity with the purpose of

designating the value loss of an investment in case of contract breaching due to
opportunism. Assets specificity refers to the possibility of this being redistributed for
other uses and by alternative users without sacrificing the productive value. The
importance of assets specificity becomes clear in the context of unfinished contracts.

As Williamson (1996) points out, a transaction is not aligned when the price, the period,
the safeguards and the specific assets involved are not considered simultaneously in
time and, therefore, it is highly probable that an opportunistic attitude takes place in the
following link of the chain. Thus, under the governance structure of the “contract,” it
can be observed that the conflict points cannot be settled, given that the transaction is
not aligned, especially on account of the contract incompleteness (the producer is not
aware of the prices to be perceived). The producer position remains weakened as the
high specificity of the asset involved does not allow him an alternative product reuse
without a significant drop in the price. The low safeguards, together with the high asset
specificity, determine the specialty product (counter season export fresh fruit) to be sold
in the internal market or to the industry at a commoditized value (Graphic 1).

Graphic 1. Simple contracting diagram

Source: Williamson, 1996.

The efficiency of an agribusiness system is based on the capability of creation and value
sustainability and, in this sense, the aspects of coordination between agents become
indispensable. Value sustainability is related to the way in which agents solve questions
of value appropriation and resolve distributive problems that can generate potential
conflicts.

Coordination involves reconciling the interests of economic agents. Interests conflicts

generated by asymmetric information, opportunism and limited rationality are
explanatory variables for the competence emergence and, subsequently, for capturing
the profits obtained in the transaction (Zylbersztajn & Farina, 1999).

3. Results
3.1. Macro analysis

Blueberries export in Argentina has increased to 82 million dollars, representing an

increase of 5,432% (1999-2009). Nowadays, about 12,000 tons are produced,
distributed along 5,000 ha, mostly in the north and center of the country.

With respect to destinations, the US is still the main one by far, receiving 70% of
southern blueberries; it is followed by Europe (Continental Europe and the United
Kingdom) that buys 25%. The other destinations continue having very little relevance,
as they only receive 5% of southern exports. Among the minor destinations, the most
important ones are the Far East, Canada and some Latin American countries. In 2008,
South America sent 55,000 tons of blueberries to the north markets.
Argentina is playing its main worldwide role as the second participant in counter season
supply regarding volume, after Chile,6 being the annual export participation little with
respect to major producers of the north, such as the US and Canada. It is worth
mentioning that Argentine fresh blueberries exports represent 94% of the national
production, 3% correspond to domestic fresh fruit consumption and another 3% to the
elaboration of byproducts (CAPAB, 2008). Production dates are: January/February
(5%), March/October (12%), November (61%) and December (22%), corresponding to
the different regions (Figure 1). In the Argentine Northwestern region the production is
the most first fruit one in the southern hemisphere, that is, the first fresh fruit available
for the northern hemisphere markets. Its production starts on week 37 (middle of
September), for example in Tucumán, and it extends until week 50 (December 15th). In
Entre Ríos the production beginning occurs during week 42 (October 15th) and finishes
on week 52 (December 31st). In the north/center of Buenos Aires, the production begins
on week 44 (October 25th), finishing on week 2 (January 15th).

Figure 1. Argentine production regions according to the last implantation

campaign 2006-2007

Source: the authors, based on SAGPyA

The province of Entre Ríos remains the first origin of exports by province, but its
participation drops from 44% in the 2008/2009 season to 37% in 2009/2010. This is not
the case of Tucumán, as it has increased its volume from 22% to 35%, positioning itself
as the second exporter. Buenos Aires’ participation dropped from 17% to 14%.

6
Chile continues being the main supplier, offering 75% of southern blueberries, followed by Argentina
with 21% and minor suppliers (Uruguay, New Zealand and South Africa) with 4%.
 Graphic 2. Production Participation per Province in 2009/2010 season

Other 14%
Entre Ríos 37%
Buenos Aires
14%

Tucumán 35%

Source: designed by the authors based on SENASA data.

The Chilean supply begins in November. Chilean blueberries, like all Chilean fruit, are
well-known for their quality, perseverance and compliance with counter season offer.
The consumer (or supermarket buyer in the US) will opt for the Chilean product: when
appearing in the supermarket aisle, it is promoted for its origin, situation that does not
occur in the cases of Argentine or Uruguayan blueberries.

3.1.1. Sectoral statistics

The blueberries business in Argentina appeared as a counter season fresh fruit export
business. Argentina’s ability to produce this fruit allowed it to be superbly positioned
regarding price levels and the chances of allocating the product. In next graph it is
shown that the increase in export volume was accompanied with a decrease in average
prices.

It can be observed that since the 2005-2006 season prices are almost a third of those at
the beginning of the Argentine exportation.

Graphic 3. Exports value, Tons and U$S/kg (FOB)

25
80.800

70.800
Exports (Value and Volume)

20
60.800

50.800 15
FOB

40.800
10
30.800

20.800
5
10.800

800 0
94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09
19

19

19

19

19

19

20

20

20

20

20

20

20

20

20

20

Years

Tons Thousands U$S FOB U$S/Kg

Source: designed by the authors based on SENASA and INDEC data

When analyzing the early production months in Argentina, together with the price curve
in the counter season window, it can be observed that, before reaching the maximum
peak of production, the price has already begun to decrease. Thus, it can be said that the
best prices are captured by first fruit production areas, which is, for example, the case of
Tucumán (Graphic 5). The remaining production zones within the country obtain lower
prices, like Buenos Aires, for example.

Graphic 5. Blueberry Argentine Export (Tons) per month and Average Price in
dollars (FOB) per exported kilogram with Seasonality in 2009
8.000 16

7.000 14

6.000 12

5.000 10
Volume

Tons

FOB
4.000 8
U$S/kg
3.000 6

2.000 4

1.000 2

0 0
Jun-Aug Sept Oct Nov Dec
Months

Source: designed by the authors based on SENASA data.

A survey conducted by the Blueberry Producers Chamber in Tucumán (2006) has

revealed that the economic results of blueberry production were not satisfactory for the
sector during the last seasons. In the last campaign, only 5% of production in Tucumán
was traded at U$S 14 per kilo, and a lot more was exported at U$S 2 per kilo, which
turns the activity non-viable.

According to a UIA7 report on High Quality Fruits (2008), in Tucumán, among the
blueberries producers 60% have farms of less than 10 hectares and only 6% has 41-to-
50-hectare farms. Nevertheless, some of these producers are completely integrated,
carrying out every stage of the chain until the point of exporting on their own (only 17%
of harvest was exported directly by producers). Most of them outsource packing and
exportation services to trading companies.

As stated by Ing. Agr. Miguel Iglesias (04/02/2009): “When plantations began, incomes
for the producer were 15 U$S/kg or even more. During the last campaigns, the rates
dropped towards 2.5 to 3 U$S/kg for the fresh fruit market and between 2 and 2.2
U$S/kg for the industry. With returns between 3,000 and 6,000 U$S/ha and a harvest
cost of 1 to 1.2 U$S/kg, they have stayed far from the 40,000 U$S/ha expected at the
time of investing. Even though this reality is not excluded from a production-

7
Spanish abbreviation for Argentine Industrial Union.
concentration economy, with certain trader companies connected to US brokers that
monopolize and control prices.”

Fruit-buying price for the commercializer

The final price that the commercializer will pay the producer per tray will be determined
by its final settlement. The latter is prepared based on the respective FOB prices,
shipment port obtained by the commercializer, minus the following deductions:

a) 10% return for the trading company over the products’ FOB values;
b) Costs of materials and packing, and costs generated by their damaging or loss;
c) Customs clearance services;
d) Domestic transportation;
e) Given advances;
f) Market distribution services;
g) Export rights.

It is worth mentioning that the settlement is carried out once the producer delivers the
blueberry to the commercializer, thus there are no ex-ante safeguards, and the producer
lacks information or enough negotiation power to claim anything in case of disagreeing
with the settlement.

3.2. Micro analysis

At this level, the organizational environment was analyzed, that is, the players; and
among these, the study focused on the relation between blueberries producers and
trading companies in Argentina.

3.2.1. Description of the agents

As showed in Graphic 6, the blueberry-growing chain is composed of consumables

suppliers, producers, packing/trading companies, wholesalers, retailers and consumers.
As regards the producers, there are two types: those who solely carry out the production
activity and trade their production with the next link (market and/or hybrid), and those
who have certain degree of vertical integration with packing plants, classification
technologies, as well as installations and refrigeration equipments. In approximate
numbers—as a census of producers has never been conducted—it is thought that by
2008 there were about 500 producers, approximately 60 in Tucumán, 90 in Entre Ríos,
250 in Buenos Aires, and the rest throughout different regions within the country.8

With relation to the producer, we find consumable suppliers such as: agrichemicals
(fertilizers, herbicides, pesticides), items related to infrastructure (irrigation equipment,
mulching, storehouses), plants (nurseries), farming machinery and tools, services
(consultancy, transportation, refrigeration, labor), and so forth. Producers buy these
consumables according to the necessities that arise or are planned.

The following link is the packing and refrigeration plant. The producer (small and
medium, generally) delivers the product on consignment in order for the plant to
process it and being ready for trading. Refrigeration and packing plants are located in
production or neighboring areas, though there are companies that have plants in several

8
Personal Communication: Alejandro Casado de Achaval (CAPAB´s President)
regions. In total, there are about 65 export firms in Argentina, some of them with
headquarters in the product’s destination countries, of higher or lower operational levels
that range from 1,600 to 0.3 tons.

As for the trading of the packed product, it is carried out by producers, by packing
companies and/or by brokers. This trading follows specifications about quality and
preservation, which adds specificity to the product. On the other hand, the trading
volume will always be larger for the buyer, with respect to the seller, many times
generating problems regarding power of negotiating and unfinished contracts. These
players within the chain also have greater power of negotiation as they can opt for
different producer countries or production regions inside Argentina (product supply).
This has led to the blueberries’ prices in the latter, as seen above, have decreased due to
a greater supply, not only at national scale, but also from the counter season producing
countries (Chile, New Zealand and Uruguay).

Graphic 6. Agribusiness System according to TCE

INSTITUTIONAL ENVIRONMENT: Culture, Tradition and

Educational Level, Legal System, Customs.

Suppliers Producers Packing /

T1 T2
Trading Companies
T3

Wholesaler Retailer
T4
T(n): Transaction T5

Consumers

ORGANIZATIONAL ENVIRONMENT: Public and Private

Offices, Information, Cooperatives, Firms.

Source: designed by the authors based on Zylbersztajn, 1996.

For the present work a study on the overall chain won’t be offered, although it would be
of utmost usefulness to understand the system’s competitivity and, thus, will be done in
future papers. From the conducted interviews, the authors observed that the transaction
with higher conflict level has always been the one between blueberry producers and
packing/trading companies. Therefore, we will carry out the analysis proposed by
Williamson (1985) regarding the transaction attributes in T2 transaction, in a context of
high specific assets and where the quasi-income they generate needs to be safeguarded.

3.2.2. Transaction “Producer-Trading/Packing Companies” (T2)

The transaction attributes are: the frequency with which they recur, the degree and type
of uncertainty to which they are subject, and the asset specificity. In this transaction, an
analysis of it based on those three elements will be conducted, in particular at the small
and medium producer level, which are the ones with no possibility of integrating
forwards, vertically, and trading directly with the international market.

The producer offers blueberries at a specific moment of the year and has to trade his
production with the trading company. Usually, for this transaction, it is the producer
who delivers the blueberries to the packing/trading company, which, in turn, takes
charge of selection, packing and trading by charging a commission for such process.
The trading company is in charge of getting clients and the objective market, by
negotiating prices with importers. On this price, after the commissions and expenses
(packing, consumables, transportation and export), the producer receives the settlement,
generally 45 days after delivering the blueberries. In these cases, the transaction only
occurs because of the service provided by the packing and/or trading company, and not
because of the product purchase (on consignment).

Thus, the packing and/or trading company prefers to rely on few producers, especially
the medium ones. Small producers miss the opportunity to make transactions with these
agents and so end up trading their production in a typical spot market, under really high-
perishability conditions and low power of negotiation, with little knowledge of
alternative markets. That is why during the last years smaller producers have been
disappearing, the farms either absorbed by medium and big producers or they were
mainly abandoned.

So, T2 transaction has been generalized in these years towards credible commitments
between producers and trading companies. This relation leads the involved agents
toward the construction of trust and thus, in general, the transaction frequency is high (it
recurs, not only in different harvest seasons within the same year, but also from year to
year).

In spite of this, the producer lacks enough information about demand of these products
in the international market, which could enable possible opportunist actions on the part
of the trading companies, that can manipulate prices and/or trading conditions quite
freely, improving their own profitability. This entails high uncertainty levels and ex-
post transaction costs, in case the producer decides to verify the corresponding
information.

Uncertainty is present for both agents due to the characteristics of the production. For
the trading company, it must receive the blueberries in the agreed time and form (where
there aren’t further problems) and, for the producer, when collecting the final settlement
payment at a certain price that will guarantee the next production.

Finally, this situation is much more complex when considering that specific assets for
the producer (plantation, perishability of the product, human resources, etc.) are really
high. For the packing/trading company specificity is medium, especially with regards to
infrastructure, as it can be used for other products or berries, even though the trading
know-how is a highly-important asset for this company.

On the other hand, as the producer incorporates international demands (innocuousness

and quality certifications), the higher the level of product specificity is, which turns
indispensable relying on a contract with a company that trades with the objective
market. This investment is many times a sunk cost that doesn’t represent an additional
income for the producer, but just the possibility of entering the market.
As a result of the analysis of the transaction, the blueberry business in Argentina, in
view of the disruption of international prices and the lack of chain coordination,
planning and management, tends to be concentrated in bigger productive scales. For
example, in the case of low and medium production scale producers, an appreciable loss
of perceived value has been observed for the traded product, together with a high
uncertainty (on price, payment period and quality discounts). These facts have deepened
the conflict between producers and trading companies, resulting in agreed contracts with
low level of compliance. The hybrid forms observed at the medium and low scale of
production are presented as inefficient given that the producer perceives a lower price
for the traded product. He produces within a specialty business and trades as if the
product were a commodity.

e. Conclusions
It can be stated that, nowadays, in the Argentine blueberry transaction between producer
and traders there are several critical points and management, social relations, trust,
uncertainty and information handling issues get involved. It can be observed that there
is a lack of alignment of the governance structure with respect to the product being
commercialized; hybrids forms are often informal and incomplete contracts, in a
situation of great levels of specific assets. Following Williamson (1985) the governance
structure should be formal contracts.

Mostly, producers commercialize their production with a known packing/trading

company, but opportunistic behavior jeopardizes the business. Currently, prices paid to
producers are lower than the calculated at the time of the investment, and there is an
absence of profitability in the business. As a result, the small producers exited the
business, increasing the concentration of production.

There is a significant uncertainty due, mainly, to the low transparency in the formation
of prices paid to producers: the commercializing company knows beforehand the price it
will perceive for the product, on the contrary, the producer does not know the price until
the payment. However, producers repeat transactions with traders, which entails
thinking that the knowledge of the market and trading matters is poor.

This means that, considering the existence of opportunism, unfinished contracts, and in
the presence of specific assets, the organizations should respond by creating governance
structures that enable the execution of long-term contracts, a pattern that doesn’t prevail
for the time being.

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