The Coffee Quality Program in Brazil

CHAPTER 4

The Coffee Quality Program in Brazil Geraldo Magela Jardim Barra

Federal University of Juiz de Fora, Juiz de Fora, Brazil

4.1 Introduction In Brazil, until 1991, the regulation of the coffee market incurred a negotiation schema that was unfavorable to producing quality; also given was the fact that volume was favored to the detriment of value differentiation in terms of quality. Due to that, among other reasons, Brazilian coffee firms’ strategies prioritized the production of quantity. The legacy of this policy was the consolidation of a worldwide negative image of Brazilian coffee. Nonetheless, with deregulation, a scenario emerged that favored value differentiation in terms of quality. The end of the International Coffee Agreement (ICA), the extinction of the Brazilian Coffee Institute, and pricing control over the commodity influenced the creation of a new scenario. There was a latent demand for actions oriented toward the promotion of Brazilian coffee quality, with the emergence of business associations oriented to implementing collaborative strategies. This context prompted a demand for better organization of the agents, with the support of business associations that spread at a rapid rate to meet the interests of their members (Barra and Machado, 2014). Indeed, in late 20th century, the alteration of the Brazilian institutional environment was one of the fomenters of transformations in business associations. Many business associations that once acted as mere interlocutors with the Brazilian government have broadened their scope of performance with proactive management concepts. Back then, these business associations also improved their contribution to the process of coordination among Brazilian coffee agents. In this new competitive scenario, when a coffee grower belongs to a business association, it gains institutional support for generation of new business deals and maintenance of the business. Due to the increasing number of business associations in the Brazilian coffee agribusiness, demand is created by studies describing the role of these organizations. Coffee Consumption and Industry Strategies in Brazil https://doi.org/10.1016/B978-0-12-814721-4.00013-5

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Traditionally, studies on business associations have treated them as rent-seeking. However, research in developing countries reveals a wide range of activities undertaken by these organizations. These support functions address crucial development issues emphasized in the New Institutional Economy, such as strengthening property rights, facilitating vertical and horizontal coordination, and reducing information costs, among others (Doner and Schneider, 2000). Research on the role of institutions in economic growth began by highlighting the activities of business associations. In addition, literature on economic governance in industrialized countries has demonstrated ways in which various types of networks have helped develop institutional advantages, including the important role of business associations. However, there is still no unsystematic understanding of the conditions in how business associations affect growth in the developing world. In part, this is the result of relative academic neglect of these organizations, at least in the context of developing countries. However, studies have shown ways in which business associations have improved economic performance in developing countries in a wide variety of contexts (Doner and Schneider, 2000). According to New Institutional Economics, it is understood that, in the Brazilian coffee market, relations are based on a high transaction environment, demanding institutional support actions, such as those undertaken by business associations.This type of environment makes it difficult to establish transactions, because it is tough for organizations to become competitive within a system that is not coordinated, and where there is a predominance of opportunistic actions among agents. The certification provided by business associations, for example, is an important investment to operate in the Brazilian coffee market, because it is a quality instrument that reduces transaction costs and reduces the asymmetry of information between the buyer and seller (Barra, 2006). In this scenario, the Brazilian Coffee Industry Association (ABIC), the Cerrado Mineiro Coffee Growers Federation, and the Brazil Specialty Coffee Association (BSCA) are examples of business associations that started to play an important role in the coordination of Brazilian coffee agribusiness. Due to the deregulation and the new attributions of the Brazilian government and business associations, it is pertinent to analyze the role of business associations and the Brazilian government in this new competitive scenario. The coordination of Brazilian coffee agribusiness can be carried out by the collective actions of business associations. It is worth mentioning that,



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in Brazil, there are already previous studies on the business associations in Brazilian coffee agribusiness (Farina et al., 1997; Barra and Machado, 2014). It is assumed that it is important to discuss the role of business associations in the process of coordinating Brazilian coffee agribusiness. In this chapter, the Coffee Quality Program of the ABIC was chosen. The purpose of this chapter is to describe the role of Coffee Quality Program certification in the coordination of Brazilian coffee agribusiness. ABIC is a business association that acts as a provider of collective action to improve the performance of its members. Authors like Williamson (1985) and North (1990) illuminated the theoretical discussion. Although this chapter uses the concepts of new institutional economics, widely published in the literature on the coordination of Brazilian coffee agribusiness, this work tries to point out new important variables for commercialization in the Brazilian coffee market. One position in Institutional Economics, derived by North, is that institutions are the rules of the game under which organizations like firms and business associations try to maximize their gains. They merely seek to maximize the incomes of shareholders or members. The broader rules of the game do all the theoretical work in explaining large outcomes like growth, investment, and entrepreneurship. In the other hand, Coase and Williamson treat firms as institutions, which also constrain the behavior of economic agents. Although they devote almost no attention to business associations, their definitions can accommodate business associations as institutions to be explained (Doner and Schneider, 2000). According to North (1990), if institutions are the rules of the game, organizations and entrepreneurs are the players. The framework of this research views the role of associations in an analogy with football. Whereas institutions are the “rules of the game” and entrepreneurs are the “players,” associations can act as “coaches” and the government can act as a “judge” or “referee.” The focus is to describe the role of business associations in the coordination of agribusiness systems. The government will take care of the rules of the game, encouraging virtuous practices and inhibiting improper conduct in the market. This chapter discusses the representation that business associations have in a new institutional environment. Section  4.2 briefly reviews institutional theories, systematizing a conceptual analysis to be applied to studies of Brazilian coffee agribusiness. In Section  4.3, the historical context of the institutional environment of the Brazilian coffee market takes place. Section 4.4 presents the methodology used to produce the research data

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and findings. Section  4.5 shows the role of business associations in the coordination of agribusiness systems. In the final section, we draw some conclusions.

4.2  Theoretical framework 4.2.1  New institutional economy Williamson (2000) defines the typology of four analytical levels that allows us to broaden the view of the study of organizations. In this typology, the first level is composed of informal institutions, whose object is focused on the formation of a rooted social structure, in which evolution occurs between centuries (Grannoveter, 1985). The second level is composed of the institutional environment, whose object is the formal institutions, which are treated as the “rules of the game” and whose evolution occurs between decades (North, 1990). The third level is composed of governance, with evolution from a year to a decade (Williamson, 1985). At the fourth level are the contributions of the theory of agency and neoclassical economy, where organizations are characterized by continuous evolution. The new institutional economy is predominately concerned with levels 2 and 3: the institutional environment and institution of governance. The convergence of economic theory with institutionalism was consolidated by the new institutional economy, mainly through the premises elaborated by Coase (1937); this author approached the firm in this seminal article as a “nexus of contracts,” providing the basis for the works of Williamson and North. Coase (1937) demonstrated that, in addition to production costs, there are transaction costs associated with the use of market mechanisms; thus it was possible to understand firms as institutional arrangements that conduct transactions through formal contracts or informal agreements (Zylbersztajn, 1995). The institutional matrix of a society encompasses the institutions (rules of the game) that will define the vector of stimuli for economic agents. These institutions reduce the uncertainty of transactions between agents by establishing a structure for their interaction. Whereas formal institutions are constituted by norms formalized by public agents, informal institutions are codes of conduct socially constructed in this society (North, 1990). In this research, the institutional theories were revisited, systematizing a conceptual analysis to be applied to studies of Brazilian coffee agribusiness. The historical context of the institutional environment of the Brazilian coffee market took place, emphasizing the collective actions. Based on the



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analysis of institutional theories, it was shown that the new institutional economics produces an analysis of these strategies consistent with production systems from the aspect of transaction costs. One position in the new institutional economy, derived by North, is that institutions are the rules of the game in which organizations, like firms and business associations, try to maximize their gains.The rules of the game do all the theoretical work in explaining great results like growth, investment, and entrepreneurship. On the other hand, Coase and Williamson treat companies as institutions that also restrain the behavior of economic agents. Although they do not pay attention to business associations, their definitions can accommodate business associations as institutions (Doner and Schneider, 2000). The economics of transaction costs allows the establishment of a relationship between the attributes of the transactions with the most efficient forms of organization in terms of transaction and production cost savings. It is assumed that a more efficient form of governance will be a consequence of the attributes of the transactions and of the parameters established by the firm’s institutional environment (Zylbersztajn, 1995). Williamson (1991), treating the dimensions of transactions as parameters, proposes that the comparison of the relative efficiency of governance structures for each type of transaction by means of an analytical model defines the level of asset specificity as the main variable. The form of governance will be selected based on a level of asset specificity, according to the comparison of the costs of establishing the transaction in the market through vertical integration or hybrid forms. There are three groups of factors conditioning the efficient forms of governance: the behavioral assumptions, the characteristics of the transaction, and the institutional environment.Therefore, to understand transaction cost economics, it is essential to understand the impact of the behavioral assumptions of the limited rationality and opportunism in the transactions, because these assumptions influence the behavior of the individuals, generating impacts in the development of the transactions among the agents in the costs and the establishment of forms of governance (Zylbersztajn, 1995). There is the possibility of the occurrence of postcontractual opportunism due to the concepts of limited rationality and opportunism. There is a need to set up precautionary mechanisms, which may be formal or informal, such as formal contracts or other forms of coordination supported by social ties or reputation. Although the contracts are formal safeguards that aim to control variability and mitigate risks (Zylbersztajn, 2005), contracts due to limited rationality are characterized as incomplete (Williamson, 1996).

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Finally, transaction cost economics allows formulation of hypotheses about the organization of productive systems in the context of agribusiness (Zylbersztajn, 1995), and this theory may include the study of the role of business associations.

4.2.2  Collective action Olson (1965) contributed to research on the role of business associations by establishing the proposition that interest groups are providers of collective benefits, and that their existence is hampered by the free rider. The concept of collective benefit as a stimulating factor for the formation of groups demonstrates that individuals encouraged by self-interest should group together to provide collective benefits, because no agent will be willing to bear their cost independently. Therefore, the free rider is implicit in his theory of the logic of collective action, although this term is not quoted in the author’s work (Nassar, 2001). Firms in a perfectly competitive industrial sector, as a common interest, maximize their sales and stipulate a high price for their product. As the rise of production in industry causes the price to fall, profitability tends to decrease in the firms of this industry when production rises. Maximizing a firm’s profitability leads to reduced profitability in the industry. Firms have both common interests at higher prices and conflicting interests in relation to production. Because it is not rational for an individual entrepreneur to reduce his output to achieve greater prices for his sector in a perfect competition market, it is not rational for this entrepreneur to pay for the government’s support alone. There is no interest of the entrepreneur to individually assume the costs of such collective benefits (Olson, 1965). The member of a large organization is in a position analogous to the firm in a perfectly competitive market, because the loss of one participant will not increase the cost to another in any perceptible way. The departure of a participant, or their noncontribution to the collective benefit, does not lead the participant to believe it will lead other members exhibiting the same behavior. This member believes that he will be able to enjoy the collective benefit, whether or not he has contributed to the group. For him, his individual efforts will not result in the realization of the collective benefit, to the point that others stop collaborating. This fact makes collective action difficult, as it leads to the possibility of free-rider behavior (Olson, 1965). Olson (1965) creates a distinction between small and large groups, demonstrating principles of functioning and shedding light on the problem of collective action. In large groups, there is a greater tendency to create



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a favorable environment for free riders than in small groups, because the collective benefit, by its very nature, makes it impossible to exclude those who did not participate in its provision. Not all members are willing to pay the same amount for the collective benefit, as each member can value it differently. According to Olson (1965), the larger the group, the smaller the member’s perception of the importance of their contribution to the provision of the collective benefit. Indeed, if a member of a small group does not participate in the provision of the collective benefit, there may be an increase in the cost of provision for the other members. With this, they may decide not to contribute more to the provision of this benefit, causing its extinction. This perception tends to avoid nonparticipation because, in this case, the member visualizes the importance of his contribution. However, there is a tendency for there to be no clear perception among the members of large groups, increasing the chances that the collective benefit will not be provided. Olson (1965) believes that there are two trends. In large groups, as the benefit is more subject to the appearance of free rider, there is a need for coercion mechanisms or stimuli to avoid such behaviors.With respect to small groups, the collective benefit can be provided in general, without the need for coercion or any stimulus. In the latter case, the benefit itself is enough to encourage collective action. Commonly, in small groups, the collective benefit will be provided by the members’ own interest, since the substantial percentage of the total gain of this benefit tends to be greater than the large ones because of the smaller number of members. Each member views the collective benefit as a generator of individual gains that outweigh the costs of providing it. For this to occur, it is enough for a member to have such a perception. The collective benefits will not be efficiently provided, even in small groups, since they are offered to all members, regardless of the degree of participation. Olson (1965) characterizes the groups according to different incentive structures, dividing them into three categories: privileged, intermediate and latent. The privileged are the smaller groups, whose members are encouraged to contribute to the provision of the collective benefit, even if they must bear the costs alone. In this case, the need for group coordination or organization is avoided. Intermediaries are groups in which no member is willing to shoulder the collective benefit provision alone, but it is not difficult for members to realize if a member does not co-operate for this provision. In this case, there is a need for group coordination and organization. The latent

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are larger groups in which there is no perception of the members about the importance of their contribution to the provision of the collective benefit. In this case, there is a need to create selective incentives. The group action in the latent groups will only be stimulated by a selective incentive. Selective incentives can be achieved by means of positive economic or social stimuli for those members who act in the group’s interest. For those who do not bear the costs of group action, selective incentives can be realized through coercive actions. In this case, the noncontributing member can be excluded from the collective benefit. According to Olson (1965), there are two important concepts for understanding the formation of groups that can be extracted by synthesizing their propositions: large groups differ both quantitatively and qualitatively from small groups, and the determining factors for the existence of small groups explain the existence of large groups. Olson (1965) did not care about heterogeneity when discussing group size. For Olson (1965), large groups (even those of agents of a single industry) have high costs of communication and negotiation that can inhibit collective action. In turn, the smaller groups (even the heterogeneous ones) present low costs. Thus, smaller groups become more preferable than large groups. Business associations can be understood as collective actions that aim to contribute positively to the performance of their members through the provision of collective assets and selective incentives. The efficiency of a business association’s actions relative to its members is defined as the ability to generate a return greater than the cost of membership, providing positive results in terms of collective goods and selective incentives (Nassar, 2001).

4.3  Institutional environment of the Brazilian coffee agribusiness 4.3.1  Coffee market: The role of Brazilian government The regulation under the ICA, which is aimed at stabilizing rural incomes and maximizing foreign exchange earnings through exports, interfered in the whole Brazilian coffee agribusiness. The regulation of coffee in Brazil has shown that the policies oriented to a specific segment end up generating impacts in other segments, demanding other interventions. With deregulation, the coordination exerted by the Brazilian government was realized by market agents as business associations (Farina et al., 1997). In the regulation period, there were no incentives for the coffee farmer to invest in differentiation; he could not add value to his product, because



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the way of commercialization in Brazil did not prioritize quality assessment. In turn, with deregulation, some coffee growers began to invest in the production of certified coffees. In a deregulated market context, there is no longer any sense in thinking about coffee in terms of restrictive macroeconomic policies. However, this does not mean reducing the role of the institutional environment in this segment (Saes and Nakazone, 2002). Since the early 20th century, the coffee market has been the subject of intervention policies. In 1906, Brazil initiated a unilateral policy of price support, because it was responsible for three-quarters of the world’s coffee production (Saes, 1995). Up to 1960, Brazilian government policies were aimed at price appreciation through supply constraints.The Brazilian government used this policy because it had a situation of a near-monopoly in the market. Due to new competitors and a decline in marketshare, the Brazilian government sought other producer countries to implement pricing policies (Saes, 1995). Until the early 1960s, the Brazilian government tried to implement agreements with producer countries to share the cost of the pricing policy. With the failure of these attempts, Brazil alone was at the cost of stabilizing the coffee market. In 1962, the first ICA was established with 25 purchasing countries and 42 exporting countries. Since then, the coffee market has been systematically manipulated by price support policies by the economic clauses of the ICA (Saes, 1995). It was only through the Brazilian Coffee Institute, created in 1952, that there was a greater market expansion of coffee produced in Brazil (Saes and Nakazone, 2002). The Brazilian Coffee Institute encouraged the Brazilian coffee sector through projects such as a campaign to increase domestic coffee consumption; a program to encourage the production of soluble coffee; and a resolution to restrict the entry of companies in the roasted coffee sector. Brazilian government intervention in the coffee market arose because of the significant share of coffee in export revenues. The Brazilian government’s need to maximize revenues from coffee exports to create a source of revenue (now to leverage the process of import substitution or to help reduce budget deficits) has led to increased sector regulation (Saes, 1995). In 1996, the Coffee Policy Deliberative Council (CDPC) was created with the purpose of aggregating the entities of the coffee business. The coffee segments were formed by the following organizations: National Confederation of Agriculture (CNA) and National Coffee Council (CNC) representing production; ABIC representing the roasting industry; Brazilian

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Association of the Soluble Coffee Industry (ABICS) representing the soluble industry; and the Brazilian Coffee Exporters Council (CECAFÉ) representing exporters (Saes and Nakazone, 2002). Brazilian government policy was able to reconcile the public interest, the implementation of economic policies, and the private sector. The regulation was based on a harmonious pattern of interaction between Brazilian government and private sector. The bond allowed compromise in which the agents acted in consonance with the rules established by this interaction. The private sector delegated its right to carry on its business in return for a guarantee of minimum levels of profit. The Brazilian government began to coordinate the Brazilian coffee agribusiness with macroeconomic objectives. Brazilian government power guaranteed that there would be no market players breaking the “rules of the game” for their own benefit (Saes, 1995). In 1991, the Brazilian Coffee Committee was created to be the interlocutor of the Brazilian coffee sector with the government and international organizations (Saes, 1995). In 1993, with the failure to negotiate new ICA clauses, more than 30 producing countries established the Association of Coffee Producing Countries (APPC). In 1993, an agreement was signed in which the countries of the APPC assumed a commitment to retain 20% of exports. To manage retention, the National Coffee Department (DENAC) was created as a claim of a part of the sector to replace the IBC (Saes, 1995). The regulation period has incorporated a very unfavorable form of negotiation to produce quality coffees. There was no incentive to invest in quality, because the volume was prioritized and there was no differentiation in quality. Brazilian government policy contributed in large part to the nondevelopment of certified coffees, creating obstacles to the establishment of strategies to accompany the changes of the late 20th century (Saes, 2004).

4.3.2  Coffee market: The role of business association Historically, the business associations that once acted as mere interlocutors with the Brazilian government have broadened their scope of performance. In the 1990s, business associations of the Brazilian coffee sector are reformulating their strategies with changes in the institutional environment. This new context prompted a demand for better organization of the agents, where these organizations seek to provide members with suitable institutional support for the generation of new business deals and maintenance of the business. In addition, some business associations of the Brazilian coffee sector are increasing their contribution in the process of coordination



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among the agents of Brazilian coffee agribusiness.With deregulation toward the late 20th century, the business associations have been attempting to change the image of Brazilian coffee in the international market. Indeed, its actions have so far had positive externalities for Brazil’s coffee agribusiness contributing to the business of economic agents (Barra and Machado, 2014). So, it is understood that the coordination of Brazilian coffee agribusiness can be carried out by the collective actions of business associations. These organizations have the capacity to act as an agent of coordination, having the capacity to strategically fill a space occupied by the Brazilian government in the regulatory period. Indeed, since the deregulation, business associations broadened their activities and started to play an important role in the coordination of Brazilian coffee agribusiness, as well as in the competitiveness of the entire Brazilian coffee sector. These organizations have been strengthened by their strategic role in defending the interests of their members. In the 1990s, a new dynamic emerged in the Brazilian coffee market, which became one of the fomenters of transformations in business association. The business associations that once acted as mere interlocutors with the government—agents of rent-seeking—broadened their scope of performance. Since then, business associations of the Brazilian coffee market reformulated their strategies with the changes in the institutional environment. This new context prompted demand for better organization of the agents, where these organizations seek to provide members with suitable institutional support for a generation of new business deals, increased gains, and maintenance of the business as agents of trust. In addition, some business associations of the Brazilian coffee sector are increasing their contribution in process of coordination among the agents of Brazilian coffee agribusiness as agents of coordination (Barra and Machado, 2014). The growth of the market for coffees and the demand for products certified in the global markets caused impacts on the Brazilian coffee agribusiness after deregulation. This scenario required coordinated activities of the business associations not only at the horizontal but also at the vertical level. Among the new attributions that these organizations began to assume, the following stand out: certification of agents in the supply chain, joint actions with the Brazilian government, and partnerships with other business associations (Barra, 2006). According to Farina et al. (1997), there was an increase in the discussion about the role of business associations in the coordination of economic

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activities from the reduction of government intervention in the European economies in the late 20th century.With deregulation, it was perceived that market and government failures could boost the role of business associations. The business associations, among other roles, can act in the provision of collective goods, which are subject to “free rider.” Although these assets can be provided by the Brazilian government, there are advantages to be provided by business associations. Partnerships with business associations along the production chain are also essential activities for the coordination of activities. BSCA’s interactions with the development of the specialty coffee market are highlighted, notably the interface with the Specialty Coffee Association of America (SCAA), Specialty Coffee Association of Europe (SCAE), and Specialty Coffee Association of Japan (SCAJ). BSCA’s interaction in the coffee market through competitions, fairs, visits, trade missions, and other means has been important for the business of its members and for the Brazilian coffee sector (Barra, 2006). After the deregulation of the coffee market, and the redefinition of the roles of the Brazilian government and business associations, the policies and dynamics of the Brazilian coffee agribusiness were no longer established by the Brazilian government alone. The mechanics of this productive system will be increasingly related to the negotiations between the Brazilian government and business associations, which will begin to act to assert interests of the associates and the Brazilian coffee sector (Saes, 1995). Business associations filled a space left by the market and the Brazilian government after deregulation. Business associations began to carry out essential activities for coordination and, therefore, facilitated the implementation of differentiation strategies.With deregulation, the business associations began to carry out more proactive work in the support of their associates, by providing a set of actions aimed at facilitating the production process of its members in a new perspective related to the coordination of Brazilian coffee agribusiness. The growth of economic concentration, combined with the reduction of Brazilian government interventionism in Brazilian coffee agribusiness, created new demands for business associations. Indeed, business associations can carry out actions to support their members’ businesses, such as provision of information for the sector, institutional marketing, collective purchases, participation in the creation of sectorial policies, etc. (Saes and Nakazone, 2002). In Brazil, deregulation required a redefinition of the role of business associations. The business associations contain elements that may allow for



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the coordination of economic activities and may constitute functional institutions for public management. The support of business associations creates conditions that facilitate investment and the production of public goods. Collective actions to defend private interests can be made compatible with general interest objectives. ABIC was founded in 1973 with the aim of representing, through collective action, the coffee roasting and grinding industry in Brazil. In the period leading up to the deregulation of the Brazilian coffee sector, ABIC launched the Self-Inspection Program for the Coffee Industry. The self-­ regulation program reversed not only the fall in consumption but also established a new transaction profile for the Brazilian coffee sector. In 2004, the ABIC launched the Coffee Quality Program aimed at reorienting the sector and changing the perception of consumers through differentiation. Already in 2007, ABIC launched the Brazilian Sustainable Cafes Program. In turn, in 2007, the Coffee Quality Circle was launched with the purpose of certifying companies that offer coffee services. In 2016, ABIC launched the certification program with a methodology oriented toward the evaluation of coffee in capsules (ABIC, 2018). By analyzing the history of ABIC’s role in the Brazilian coffee market, the Coffee Quality Program plays a prominent role during the period of deregulation of the Brazilian coffee sector. In the domestic market, it is the certificate that allows differentiation strategies in the Brazilian coffee sector through market segmentation. The expansion of the complexity of ABIC’s actions is evident by its collective actions, as well as the sedimentation of its strategic role in the Brazilian coffee industry, having throughout its history played the role of an agent of interface with the Brazilian government, trust agent, and coordination agent.We also observe a similar trajectory in the history of the Cerrado Mineiro Coffee Growers Federation and also the BSCA. The Cerrado Mineiro Coffee Growers Federation was created in 1992 with the purpose of valuing the collective brand for the quality of the coffee produced by the region. Already in 1993, the brand “Café do Cerrado” was registered. Then, the development of an official denomination of origin system was started to avoid free riders and opportunistic actions. The Cooperative of the Cerrado Coffee Growers was created in 1995 with the objective of being a facilitator of coffee exports for the region’s farmers.The Cerrado Mineiro Coffee Development Foundation was created in 1997, with the objective of developing training projects for production (Barra and Bronzo, 2016).

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The Cerrado Mineiro Coffee Growers Federation strengthened the geographical indication process in 2005, which made it possible to value the origin of the coffee growers in this region. This organization plays the role of interface agent with the Brazilian government, and it is possible to visualize the business associations as instruments of institutional change.The role of interface agent in the Brazilian government was fundamental for the definition of rules for the designation of origin in the Brazilian coffee agribusiness (Barra and Bronzo, 2016). At the Cerrado Mineiro Coffee Growers Federation, through traceability, it is possible to identify at what stage the coffee beans are produced and moved along the chain. This organization is a federation composed of eight business associations and eight cooperatives in a horizontal arrangement. This federation coordinates the coffee production chain in a vertical way (Barra and Bronzo, 2016). In 2010, the Federation structured the brand management project of the Cerrado region, creating the expression “Cerrado Mineiro Region,” with the purpose of certifying its origin. The new brand was a marketing action to guide the region’s strategies through the “Café de Atitude” (coffee with attitude) proposal. In 2014, Cerrado Mineiro was the first region in the world to issue a denomination of origin seal for green coffee as well for roasting coffee. BSCA’s activities began in 1991 and, starting in 1992, participated in national and international fairs and events. BSCA was invited to participate in the International Coffee Organization (OIC) Gourmet Coffee Project started in 1999 as coordinator for 2 years. Beginning in 1999, BSCA launched the Cafés do Brazil Quality Competition and the Cup of Excellence program. In 1999, BSCA implemented the certification program by establishing a code of conduct that standardizes the associates’ productive practices. For that, the Socioenvironmental Management System for the Production of Special Coffees was instituted. In 1999, BSCA was chosen to conduct the Cafés do Brazil program by the Brazilian government. This program contributed to the development of the specialty coffee sector and received funding from the Brazilian government. In 2001, BSCA developed the Marketing Plan for Brazilian Special Coffees.

4.3.3  Coffee market: The role of the Coffee Quality Program In recent decades, there has been an increased focus on food safety in the coffee world market. In this context, the role of certification in the coordination of coffee agribusiness has become more and more common in recent



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decades. Certification takes responsibility for food safety in the agrifood supply chain. In addition, increasing consumer awareness regarding issues of food safety, quality, and the environment have created a growing demand for certification coffee. The certifications communicate information about the attributes of a product, contributing to a building of trust among partners. Since the early 2000s, there has been a profusion of the types of certification in the coffee market. These certificates coexist and compete, making it difficult to distinguish between the role of each certification in that market. These certificates are the result of government actions, nongovernmental organizations, and private companies (Reinecke et al., 2012). The opportunity of a negotiator presenting with opportunistic behavior is attenuated or avoided by using certificates. In the coffee market, certification facilitates decreased transaction costs because they provide buyers with information in a way that is conscious and reliable. Typically, certification is used in the coffee market to attest to the attributes of coffee when companies adopt standards that require the adoption of differentiated attributes. So, certification coffee reduces information asymmetry, ensuring that a coffee conforms to the specifications. Certificates are crucial to enter certain specialty coffee drinking countries, where there is great concern with quality, food safety, and sustainability. These mechanisms contribute to lessen information asymmetries and, consequently, reduce transaction costs in a sustainable coffee market (Barra and Machado, 2014). The concept of certification in this paper is based upon studies by several authors: Saes et al. (1998) (ABIC); Barra (2006) (BSCA); Martinez (2006) (UTZ); Mafra (2008) (FCC); Palmieri (2008) (RAS); Leme and Machado (2010) (ABIC); Pedini (2011) (FLO); Miranda and Saes (2012) (FLO); Souza et al. (2013) (FLO); Pereira (2013) (GAP); Rosa (2014) (GAP); Prado (2014) (GAP); Leme (2015) (UTZ); and Barra (2016) (UTZ) (Table 4.1). In the agrifood supply chain, the agents through investments in certification seek alternative ways to reduce the risk of opportunism. These agents develop safeguards through the development of trust and through investments in certification. The Coffee Quality Program is a coordination program of the agrifood supply chain because this certification reduces information asymmetry, ensuring that a coffee conforms to the specifications. Finally, the Coffee Quality Program was a crucial step to refocus the sector. In addition, this certification changes consumers’ perception that all coffees are equal. The purpose of the certification is to further improve the quality of coffee offered to consumers based on an objective strategy: a satisfied coffee consumer drinks more coffee. This certification served as

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Table 4.1  Coffee certification Authors

Certification

Focus

Agent

Saes et al. (1998)

ABIC (Brazilian Coffee Industry Association) BSCA (Brazil Specialty Coffee Association) UTZ (UTZ Certified) FCC (Cerrado Coffee Growers Federation) RAS (Rainforest Alliance) ABIC Brazilian Coffee Industry Association) FLO (Fair Trade Labeling Organizations) FLO (Fair Trade Labeling Organizations) FLO (Fair Trade Labeling Organizations) GAP (Good Agricultural Practice) GAP (Good Agricultural Practice) GAP (Good Agricultural Practice) UTZ (UTZ Certified) UTZ (UTZ Certified)

Quality

Rosters

Quality

Growers

Sustainability Origin

Growers Growers

Sustainability Sustainability

Growers Rosters

Fair Trade

Growers

Fair Trade

Growers

Fair Trade

Growers

GAP

Growers

GAP

Growers

GAP

Growers

Sustainability Sustainability

Growers Growers

Barra (2006) Martinez (2006) Mafra (2008) Palmieri (2008) Leme and Machado (2010) Pedini (2011) Miranda and Saes (2012) Souza et al. (2013) Pereira (2013) Rosa (2014) Prado (2014) Leme (2015) Barra (2016)

Source: Elaborated by the author.

an improvement tool for roasting companies not only to produce a better product but also to ensure consistent coffee quality and industrial process, guaranteeing quality standards in all produced lots. This certification is a reliable link between industry and consumers, and will expand to encompass basic issues for a real offer of better products (ABIC, 2018).

4.4 Methodology To understand the evolution of the Coffee Quality Program in the Brazilian coffee market, historical documents were analyzed. Data since 2000 were selected from the main Brazilian newspapers related to the economic field: “Folha de São Paulo,” “Estado de São Paulo,” and “Valor Econômico.” Data collection was carried out using keywords previously defined after a



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bibliographical research on coffee certification. Then, the keywords were ­validated by a specialist researching coffee. Table  4.2 presents the list of search keywords. Based on this set of documents, some citation news was selected to build the certification scenario in the market for roasted and ground coffee in Brazil. Table 4.3 shows the list of news selected for the research. Table 4.2  List of keywords Keywords

Description

Coffee Quality Program + ABIC

Coffee Quality Program Brazilian Coffee Industry Association Brazilian Coffee Industry Association Coffee Quality Program Brazilian Coffee Industry Association (Seal)

ABIC Coffee Quality Program ABIC Seal Source: Elaborated by the author.

Table 4.3  List of news

N1 N2 N3 N4 N5 N6 N7 N8 N9 N10

News

Date

“The oscillation of commodities” (Folha de São Paulo) “Nation wants international marketing to sell more coffee” (Estado de São Paulo) “Roasted coffee will have official control” (Estado de São Paulo) “Do you want a champion coffee?” (Estado de São Paulo) “Coffee consumption in Brazil glows 3.11% on 10/11” (Estado de São Paulo) “Entrepreneurs invest in gourmet coffee to attract the most demanding consumer” (Estado de São Paulo) “Twelve cups of coffee straight from the supermarket” (Estado de São Paulo) “Utam launches new specialty grain coffees” (Estado de São Paulo) “Gourmet or special coffee?” (Folha de São Paulo) “A coffee crop that will stay in the memory” (Valor Econômico)

11/22/05

Source: Elaborated by the author.

05/24/10 11/24/10 01/19/12 01/24/1 09/03/1 01/28/1 03/16/1 01/25/1 08/21/1

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4.5 Results 4.5.1  Coffee Quality Program Among the various types of certification provided by ABIC, the Coffee Quality Program was chosen for the number of certified brands and for being the certificate that allows for differentiation strategies in the sector through market segmentation (Table 4.4). The Coffee Quality Program, created in 2004, certifies the quality of the final product through a sensorial analysis methodology, and classifies and differentiates coffees in four categories: Extra Strong, Traditional, Superior, and Gourmet. Further certifying the product, the company is audited for its good manufacturing practices during its whole process to ensure consistency. The product is monitored by the program, and any modifications are communicated to the industry, which is geared toward maintaining and improving the flavor profile of its brand. If the quality standards are not complied with, administrative procedures are open to penalties that can result in being removed as member of the association (ABIC, 2018). In the Coffee Quality Program, the Global Quality of the Coffee Beverage is the joint perception of the aromas of the beverage and its degree of intensity. In this certification, the evaluation of the quality of the coffee beverage is made by expert cuppers trained in accredited labs through sensorial analysis and considers, flavor, acidity, body, fragrance of the coffee powder, and its bitterness, among other qualities. In this certification, the category of the coffee quality is determined according to the Global Quality obtained by the product on a scale of 0 to 10. This classification helps consumers decide which quality of coffee they want to buy (ABIC, 2018). Table 4.5 presents the Historical Documents for the period 2005–10. After the implementation of the Coffee Quality Program, it is verified by Table 4.4  Brands certified in ABIC Certification

Coffee Quality Program Sustainability Capsules Purity

Total

Quantity Gourmet

Superior

Traditional

Extra strong

 805

202

160

342

101

  28   19 1050

 11   2   –

 14   5   –

  3  11   –

  1   –

Source: Elaborated by the author.



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Table 4.5  Historical documents (2005–10)

N1

N2

N3

News

Focus/data

Coffee enters the list of products that have recommended standards for food safety. Within 6 months, the Pão de Açúcar group will only buy coffee with seal from ABIC—a label that evaluates the quality, the drink, and the flavor of the product. The Coffee Quality Program is a voluntary seal established by the ABIC, and only 25 coffee industries among the thousands of the country have it. With the demand of Pão de Açúcar, demand for this seal will increase, says Nathan Herszkowicz of ABIC He acknowledged that the coffee quality program sold domestically, launched today, is not a measure aimed at increasing exports of roasted and soluble coffee. “It will not be there that we will increase exports of roasted and soluble coffee,” he said. In its assessment, the current momentum for the sector is favorable to the growth of the market. “Brazil has a fantastic potential ahead of it, both for the sale of green coffee, as soluble, roasted and ground” ABIC’s executive director, Nathan Herszkowicz, complements, however, that the IN16 was formulated with absolute industry involvement. “We have had 13 meetings with members to discuss the matter during the period in which IN was in public consultation.”

Food standard 11/22/05

Food standard 05/24/10

Food standard 11/24/10

Source: Elaborated by the author.

the analysis of the documents that began as the proposal of a new food standard in the Brazilian coffee market. Table 4.6 presents the Historical Documents for the period 2011–14. The analysis of this period shows the beginning of maturity of the process of differentiation in the domestic market, where consumers begin to value the superior coffee and gourmet coffee through their purchases at certified coffee shops. Table 4.7 presents the Historical Documents for the period 2015–18.The analysis of this period demonstrates the consolidation of the ­differentiation

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Coffee consumption and industry strategies in Brazil

Table 4.6  Historical documents (2011–14)

N4

N5

N6

News

Focus/data

Those who love coffee, or coffee geeks, as they are nicknamed outside the country, drinkers interested in the origin of grains and the best techniques of preparation, will now have access to high quality grains. This is because the auction of the 10 finalist lots of the National Coffee Quality Competition organized by the Brazilian Coffee Industry Association (ABIC) will be open to the general public, not restricted to the industry, as in the previous six versions. They are grades that have been rated ‘very good’ and ‘exceptional’ according to the Specialty Coffee Association of America (SCAA) methodologies and the ABIC Coffee Quality Program ABIC has sought to improve the quality of roasted and ground coffee sold in Brazil for more than 20 years. And more recently it implemented the Coffee Quality Program, which aims to identify the attributes of the grain in the packaging, facilitating the choice of consumers through product differentiation (divided into Gourmet, Superior and Traditional categories). “In the year 2000, there was no Gourmet brand in supermarkets … today we have 100 gourmet cafes,” said ABIC Executive Director Nathan Herskowicz, citing the results of the organization’s work during the event With an eye on the glowing interest in gourmet coffee, small and medium grain growers take advantage to establish a direct relationship with the consumer.This is the case of Café Santa Monica, which previously only provided the product for restaurants, bakeries and coffee shops, and went to work this year with smaller packaging and sale in emporiums. Producer Luiz Cláudio Cruz has created a signature club to deliver coffee at the customer’s home. In the opinion of Nathan Herszkowicz, executive director of the Brazilian Coffee Industry Association (ABIC), this movement of producers evidences the growth of the market and shows that the consumer wants and accepts to pay more for a quality product

Differentiation 1/19/12

Source: Elaborated by the author.

Differentiation 24/01/12

Differentiation 03/09/2013



The coffee quality program in Brazil

Table 4.7  Historical documents (2015–18)

N7

N8

N9

N10

News

Focus/date

Since 2004, ABIC has tracked the quality of brands available in the Coffee Quality Program, which in addition to establishing the traditional, superior and gourmet categories, monitors affiliate products with regular tests in test laboratories. If they do not meet the ABIC criteria, the coffees do not receive the quality seal The UTAM Group, for nearly 50 years in the coffee production and distribution market, invested R $2 million in its Minas Gerais plant to have a modern and exclusive structure to produce gourmet coffees. Among the novelties of products that will have this new production structure are the Utam Speciale and Utam Crema cafes, in 1-k packs, with new blends of roasted coffee beans, and aimed at the food service market. The Utam Speciale 100% Arabic grain selection, with medium roast and hard drink, a blend with superior quality in the general coffee classification of the Coffee Quality Program of the Brazilian Coffee Industry Association (ABIC) ABIC (Brazilian Association of the Coffee Industry) has launched a project that, despite the need for adjustments, is still unique in the world: the classification of roasted or industrialized coffee. This project divided the industrialized coffees of associated companies into three categories: Traditional, Superior, and Gourmet Nathan Herszkowicz, executive director of the Brazilian Coffee Industry Association (ABIC), says the traditional coffee industry is already benefiting from the supply of higher quality grains harvested in June and being processed by roasters. Evaluation carried out within the ABIC’s Coffee Quality Program, with samples from the retail of traditional cafes, which already include some new cafes, shows an improvement in the score of this category

Consolidation of differentiation 1/28/15

Source: Elaborated by the author.

Consolidation of differentiation 03/16/17

Consolidation of differentiation 01/25/18

Consolidation of differentiation 08/21/18

85

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process in the domestic market. The experts already note the approval of the certification by the consumers of differentiated coffees, highlighting the consumption of superior and gourmet coffees.

4.5.2  Certification from the perspective of transaction cost economics Collective actions to stimulate consumption create an incentive to free-rider behavior on the part of some of the firms because knowing that they cannot be excluded from the benefit of collective action, they do not want to bear the cost of this collective action. An example are the market actions aimed at increasing consumption that generate a positive effect for all companies in the sector. Considering that a business association does not have coercive power, there is no way to force all firms to pay for such an action. In this sense, ABIC’s actions can be a contractual relationship between the business association and its members, characterized by fragility.Thus, the commitment between the members and the business association can be broken at any time by the possibility of the free-rider effect.This fact implies the challenge for the business associations to always renew its attention to the interests of its associates (Saes et al., 1988). The certification provided by a business association such as the ABIC can reduce this free-rider effect by the fact that its instrument is a quality flag effect that functions as an instrument of coordination of Brazilian coffee agribusiness. Certification is an instrument for coordinating Brazilian coffee agribusiness to ensure that all coffee has the attributes sought by the consumer. In the certification, the consumer finds a sign of differentiation and, for this reason, finds support in their purchase decision. As a result, buyers are more confident because compliance with the certification code of conduct reduces the level of uncertainty and the possibility of opportunistic actions. The certifications are mechanisms of quality and facilitators of the negotiations in the coffee market. These mechanisms contribute to the reduction of transaction costs, as quality certificates reduce the asymmetry of information in the production systems. By bringing these gains, certification in many cases can add value as an attribute that guarantees certain attributes of product differentiation. For this reason, certification of coffee makes it possible to obtain a premium price in the market (Barra, 2016). Table 4.8 presents the theoretical comparison between the benefits of certification in the coffee sector and the Coffee Quality Program. Finally, although institutions are the rules of the game and entrepreneurs are the players, the business associations act as “coaches” and the g­ overnment can act as the “judge.” In this scenario, ABIC is a set of networks capable of



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Table 4.8  Benefits of certification and the Coffee Quality Program Benefits of certification

Coffee Quality Program

The combination of lower costs (obtained by lowering production and transaction costs) and premium pricing (obtained by improving product quality) allows a higher contribution margin and result (Barra, 2016) By defining a strategy of the same price combined with lower costs (obtained by reducing production and transaction costs), it enables the producer to increase the margin of contribution. In this case, there are two possibilities. There is the possibility of an increase in the sales volume, resulting in an increase in the results. There is also the possibility that there will be no increase in sales volume. In this case, there is an increase in the result, due to the increase in the margin of contribution caused by the reduction of costs (Barra, 2016) The combination of lower costs (obtained by lowering production and transaction costs) at a lower price allows the company to achieve an increase in sales volume, thereby increasing the result (Barra, 2016)

The gourmet/superior coffee presents the ability to achieve the premium price that can be obtained by improving product quality The traditional/extra-strong coffee presents the same price capability combined with lower costs that can be obtained by improving processes allowing reduction of production and transaction costs

The traditional/extra-strong coffee presents the same price capability combined with lower costs that can be obtained by improving processes allowing reduction of production and transaction costs

Source: Elaborated by the author.

creating space for collective learning. Indeed, the members of ABIC share knowledge and exchange information through cooperation of certification programs. ABIC is a network that contributes to the build-up of trust among agents of the agrifood chain, lessens information asymmetry, and reduces transaction costs. This type of network contributes to the construction of their member’s reputation, by means of the Coffee Quality Program. Based on the discussions in this chapter, we describe the role of business associations in the coordination of agribusiness systems.

4.6 Conclusion ABIC offers an excellent example of the importance of the organizations in the support for companies that want to commercialize roasted coffees.

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The results show that ABIC performs a range of functions that can facilitate the development of the business between ABIC members and its main buyers. The competitive differential of members is based on their strategies of production, which focus on quality, and aligning productive practices with a deep concern about environmental and social issues. The ABIC has promoted an environment with a good reputation and institutional stability among its members. The findings of the present research ratify the theory that this type of organization is an agent of coordination that contributes to the build-up of trust among partners of Brazilian coffee agribusiness, to reduce transaction costs. The study enables the development of collective strategies to guide collective efforts for better performance results. The ABIC has historically contributed to the building of trust of roaster brands in Brazilian coffee agribusiness. In addition, this business association has contributed to a reduction of transaction costs in this market. Certification acts as a tool for reducing information asymmetries among agents of the Brazilian coffee agribusiness.When purchasing a certified coffee, the consumer will be able to recognize their attributes, both in the case of traditional and extra-strong coffee, as well as superior and gourmet coffee. Therefore, in future studies it would be interesting to analyze the consequences of certification and its reduction of transaction costs and asymmetry of information for consumers. It would also be appropriate in a future paper to explore the free-rider effects and collective action still in the roaster segment. The proposed theoretical framework may help the agents of the Brazilian coffee agribusiness in understanding the critical role of the certifications provided by business associations in supporting business in this productive system. Nevertheless, it is believed that studies of this reality, through deeper research, are necessary to understand this problem. It would be interesting to see how the Coffee Quality Program impacts roasters, retailers, and consumers. It is possible to raise critical success factors so that research can investigate the determinants of roasters in adopting certification. Also, it is important to analyze how certification has been recognized by the consumer segment. Finally, through the results obtained in this study, it is evident that the certification provided by business associations is important for the coordination in Brazilian coffee agribusiness, being a fundamental instrument to generate competitiveness for companies and for the sector, as already ­previously verified by research on business associations in the Brazilian



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c­ offee market. The Coffee Quality Program presents itself as an instrument capable of contributing to the institutionalization of the best productive practices.

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Further reading North, D.C., 1994. Economic performance through time. Am. Econ. Rev. 84 (3), 359–368. Ponte, S., 2002.The “Latte Revolution”? Regulation, markets and consumption in the global coffee chain. World Dev. 30 (7), 1099–1122 (2002). Rademakers, M.F.L., 2000. Agents of trust: business associations in agri-food supply systems. Int. Food Agribus. Manag. Rev. (3)139–153.