THEORETICAL AND EMPIRICAL ANALYSIS OF THE ECONOMICS OF TRACEABILITY ADOPTION IN FOOD SUPPLY CHAINS A Dissertation Presented by DIOGO M. SOUZA MONTEIRO Submitted to the Graduate School of the University of Massachusetts Amherst in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY February 2007 Resource Economics UMI Number: 3254897 3254897 2007 Copyright 2007 by Souza Monteiro, Diogo M. UMI Microform Copyright All rights reserved. This microform edition is protected against unauthorized copying under Title 17, United States Code. ProQuest Information and Learning Company 300 North Zeeb Road P.O. Box 1346 Ann Arbor, MI 48106-1346 All rights reserved. by ProQuest Information and Learning Company. © Copyright by Diogo M. Souza Monteiro 2007 All Rights Reserved THEORETICAL AND EMPIRICAL ANALYSIS OF THE ECONOMICS OF TRACEABILITY ADOPTION IN FOOD SUPPLY CHAINS A Dissertation Presented by DIOGO M. SOUZA MONTEIRO Approved as to style and content by: ____________________________________ Julie A. Caswell, Chair ____________________________________ Daniel A. Lass, Member ____________________________________ Anna Nagurney, Member ____________________________________ John K. Stranlund, Member __________________________________________ Julie A. Caswell, Department Chair Department of Resource Economics To Marta for her love, patience, and courage throughout these years. To my parents, José and Madalena for all the sacrifices they made for me, and to my siblings, Madalena and Francisco for their unconditional support. To my uncle Rafael Monjardino for his friendship and encouragement. To the memory of my grandparents. To my great-grandfather Prof. Jorge Monjardino and to my uncle Prof. Fernando de Oliveira Pinto whose academic careers inspire and challenge mine. To all my friends in Portugal, especially to Ezequiel, José Maria, Macário, and Pedro. “For this I was born, and for this came I into the world; that I should give testimony to the truth. Every one that is of the truth, hears my voice. Pilate said to him: What is the truth?” John 18, 37-38 “Deus quer, o homem sonha, a obra nasce.” Fernando Pessoa, Mensagem vi ACKNOWLEDGMENTS First and foremost I would like to thank my advisor, Professor Julie A. Caswell, for encouraging me to apply to the Resource Economics doctoral program at the University of Massachusetts Amherst, and for patiently guiding, mentoring and supporting me throughout these years. Julie has not only been an excellent advisor and a role model, but also a true friend. My wife Marta and I have an enormous debt of gratitude to Julie and to Richard for helping us to adjust to a new environment and for always being available for any professional or personal issues we faced during this time. I am also very grateful and obliged to the members of my committee: Professors Daniel A. Lass, Anna Nagurney, and John K. Stranlund for their excellent comments and very insightful suggestions, and for taking time to be part of this research. It was a great privilege and honor for me to collaborate with such a fine and renowned group of University of Massachusetts faculty members. I learned a lot from each of you and hope to have opportunities for future collaboration. I want to thank the Fundação para a Ciência e a Tecnologia (Portuguese Foundation for Science and Technology) for funding this research and providing for travel expenses to seminars and meetings where preliminary versions of this work were presented. I also have to thank Henrique Curto, António Fragata, Nelson Isidoro, Armando Torres Paulo, Sergio Pereira, Catarina Ribeiro, Domingos Santos, and João Miguel Silva for their generosity in granting me access to data on traceability adoption in the Portuguese pear industry, without which the empirical chapter of this thesis could not be done. vii My research was influenced by several people each indirectly contributing to part of the final product. I am particularly in debt to Dr. Neal Hooker who encouraged me to think about multi-ingredient foods, to Professor Barry Field for his support and help in thinking more in economic terms, and especially to Professor Joe Moffitt. Even though Professor Moffitt was not part of my committee he nevertheless contributed very kindly and generously to my research, helping me sharpen my initial ideas and always showing great confidence in my ability to carry on my work. I had the enormous fortune of having a great group of fellow graduate students in my years at the University of Massachusetts. Each of them enriched and broadened my personality. I would especially like to thank José Alves, Sven Anders, Katherine Boschert, Seda Erdem, Dmytro Matsypura, David McEvoy, Philip Mellizo, Sirisha Naidu, Linus Nyiwul, Michael Schuppli, Richard Volpe, Lava Yadav, and Yi (Alan) Zhong for their friendship and encouragement, and for walking along with me through the hurdles of graduate school. Margaret A. Cialek, Wendy J. Curtice, and Barbara A. Talenda also deserve recognition for all their help, kindness and patience in dealing with the administration and bureaucracies of the University and for attending to special requirements. Elisa Campbell from OIT and Carol Foster from the Graduate School generously helped me with the final manuscript styles and formatting. Last, but certainly not least, a very special thank you must go to Father Richard Cleary S.J., to the University of Massachusetts Amherst Newman Center Community and to the Portuguese graduate students Catholic group in Boston who contributed to my sanity, sense of reality, and growth as a human being. viii ABSTRACT THEORETICAL AND EMPIRICAL ANALYSIS OF THE ECONOMICS OF TRACEABILITY ADOPTION IN FOOD SUPPLY CHAINS FEBRUARY 2007 DIOGO M. SOUZA MONTEIRO, B.S., UNIVERSITY OF EVORA M.S., MEDITERRANEAN AGRONOMIC INSTITUTE OF ZARAGOZA M.S., UNIVERSITY OF MASSACHUSETTS AMHERST Ph.D., UNIVERSITY OF MASSACHUSETTS AMHERST Directed by: Professor Julie A. Caswell Traceability systems are increasingly implemented in food supply chains to mitigate food safety hazards and to improve information management and logistics. While traceability systems are largely voluntary and driven by consumer demand in the United States (US), in the European Union (EU) they are enforced by regulations and were implemented to restore consumer trust in the food supply. Traceability systems establish the path of information on food origins, attributes, and production and processing technologies from farm to fork, thus increasing transparency in the food chain. As the consumption of pre-prepared foods increases around the world, new types of food safety hazards may arise. Previously independent food supply chains may now come together in facilities producing multi-ingredient, pre-prepared food products. Implementing traceability in multi-ingredient food chains may mitigate food safety risks. ix This research presents three essays, two theoretical and one empirical, analyzing the economics of traceability adoption in food supply chains and at the farm. The first essay investigates under what conditions voluntary or mandatory traceability systems are preferred in single ingredient supply chains. The second addresses the conditions for full, partial or no traceability in multi-ingredient food chains. Finally, the third essay analyzes what has influenced traceability adoption at the farm level in the Portuguese pear industry. An overall aim of this research is to examine how network effects impact the levels of traceability flowing along single- and multi-ingredient food supply chains. This dissertation contributes to the economics of traceability in food supply chains showing that mandatory traceability may be inevitable if there are large public benefits from traceability, liability rules are not perfectly imposed, and monitoring and enforcement is effective. Full traceability is feasible in multi-ingredient supply chains. However partial traceability is perhaps a more realistic scenario as it may result in considerable savings for firms along the food chain. Producer organization, retailer, and farm characteristics clearly influence the decision to adopt traceability. Finally, network effects have a positive impact on the levels of traceability but a negative impact on the value of premiums. [...]... becoming an important instrument supporting existing food quality and safety assurance systems in agri -food supply chains worldwide The idea of gathering and sharing information from producer to consumer is not new or exclusive to the food industry For example, traceability is used in the mailing and package expediting industries, allowing customers to track their packages from the point of origin to... supply chains The second theoretical essay discusses the conditions for full, partial or no traceability in multi-ingredient food chains The empirical essay analyzes what has influenced traceability adoption at the farm level in the Portuguese pear industry An overall aim of this research is to examine how network effects impact the levels of traceability flowing along single and multi-ingredient food. .. 178/2002 of the European Parliament and of the Council on general food law, imposed mandatory traceability for all food products marketed in the EU It entered into force in January 2005 Thus while in 2000 mandatory traceability was only imposed in one single-ingredient supply chain, namely the beef industry, the new EU food laws of 2002 extended its application to all foods An increased interest in food. .. levels of traceability However, network effects on premiums paid to firms upstream in the supply chain depend on the structure of costs and on how benefits are distributed along the chain 8 CHAPTER 2 MANDATORY AND VOLUNTARY TRACEABILITY ADOPTION IN SINGLE-INGREDIENT FOOD CHAINS 2.1 Introduction Food supply chains are complex networks of interdependent firms, involved in the production, processing, transportation,... consumption of pre-prepared foods, which often involve the combination of different ingredients following a recipe, increases around the world new types of food safety hazards may arise This is because previously independent food supply chains now come together in the facility producing the multi-ingredient food This may increase risks of food safety hazards due to cross contamination Implementing traceability. .. where the subscript indicates the tier in the supply chain where each firm is located The third tier firms can be seen as the leader or principal of this supply chain This is consistent with Hennessy, Roosen, and Miranowski (2001) who assume that processors in the US food industry and large retailers chains in the EU are de facto leaders of the supply chain and have a “pilot role in coordinating identity... downstream levels of traceability depend on the existence of traceability from upstream, the flow of information along the chain can be suitably approached with a vertical control model 2.4 Models The analysis of voluntary and mandatory traceability adoption in single ingredient supply chains is based on three models In the first model, seen as the baseline, the motivation for traceability adoption is consumer’s... perspective, the key question is what are the main drivers and dynamics of traceability systems? To address this question, this research presents two theoretical essays analyzing the economics of traceability and an empirical study of traceability adoption at the farm level The first theoretical essay investigates the conditions in which voluntary or mandatory traceability systems are preferred in single 3 ingredient... its own information In type B traceability design, downstream firms store and transfer their own information along with that gathered upstream Finally, in the third system, type C, each firm in the supply chain sends 20 information to an external party that stores information and assures information is traced along the supply chain To model traceability adoption in single ingredient supply chains, network... unprecedented in human history and their consequences to society are yet to be fully understood One of the most striking elements of the new environment is the increasing need for coordination, demonstrated by the growing number of contract agreements in food chains (MacDonald et al 2004; James, Klein, and Sykuta 2005) Another is the concern with the level of information and transparency on food quality and . single- and multi-ingredient food supply chains. This dissertation contributes to the economics of traceability in food supply chains showing that mandatory traceability may be inevitable if there. the globalization of business and the increasing sophistication of food manufacturing and supply chains, particularly those involving pre-prepared foods. 2 In contrast to the EU, in. two theoretical essays analyzing the economics of traceability and an empirical study of traceability adoption at the farm level. The first theoretical essay investigates the conditions in which