Traceability: A Challenge and Opportunity for Chile’s Potential in Global Agribusiness
Until a few years ago, the quality of a food export could not be demonstrated until the very moment when it was tasted by the final user. That changed unexpectedly after the attacks on the Twin Towers on September 11, 2001, and inspired the U.S. Food and Drug Administration to enact the Bioterrorism Act in 2002. This well-regarded legal framework stipulates that all companies must provide the FDA with advance information about the origins of all food consumed in the U.S., including imported products.
The situation became even more demanding in January 2005, when the European Union made traceability obligatory for all agricultural and food products (Regulation EC 178/2000). The European law lays out a series of technical actions and procedures that permit companies to identify and trace each food product from its birth through its processing, manufacturing and warehousing, all the way to its distribution. Valuable information about each product is offered to consumers.
According to Jorge Pérez, dean of the business and economics faculty of the University of Santiago in Chile (USACH), food traceability has become an increasingly important way to evaluate the quality and security of all food exports because it builds greater confidence among consumers. “Traceability of products provides consumers with confidence about the origins of products in terms of their inputs and the materials used to produce them.”
Maite Jiménez, dean of the natural resources department of the Catholic University of Valparaíso (Chile), has a similar view. “Traceability brings confidence about the [goods] that you market. It becomes easier to solve any problems because the central point is to record the history of each product.” Given that fact, traceability represents a major challenge for Chile and for other countries that depend on foreign trade.
The Challenges of Traceability
Chile’s economic growth over the past decade has been based on a policy of free trade. The country has signed important free trade agreements with the principal economies of the region and the rest of the world. According to a report by the Central Bank of Chile, Chile’s exports reached approximately $58.12 billion in 2006, thanks to agreements that Chile maintains with the U.S., Europe (EFTA), South Korea, China, Canada, Mexico, Colombia, Peru, Panama and Central America. In addition, Chile’s free-trade agreement with Japan recently went into effect. Overall, this list comprises about 40 different economies in which the Chilean food industry plays an important role by offering them a range of premium products. Most outstanding are Chile’s wines, salmon, seafood and certain types of fruits.
According to Alex Medina, dean of the business department of University of Bio-Bio in Chile, food traceability is a critical tool that provides Chile with important comparative advantages. “To compete successfully in foreign markets, you have to develop a strategy for differentiation by quality. In this regard, traceability of food products is fundamental. It provides us with an advantage over other countries because we offer products whose origins and cycles of production and distribution comply with quality norms. Chile can transform itself into a food industry power only to the degree that it continues to make progress in managing its agribusiness companies and to the extent that its focus is toward [foreign] markets that require products that are more exclusive and of higher quality.”
Technology’s High Cost
Recently, demand has grown at an exponential rate for advanced information technologies that can monitor, record food products and trace them from their point of origin to their final destination. Key tools now include [specialized] software applications, bar coding, RFID systems, and products for synchronizing information and capturing data. Warehouse management systems are also growing in popularity. They automate the warehousing process by identifying each product with a serial number and retail lot number.
Already, salmon producers rely on sophisticated computer systems that can trace their product from the egg of the female salmon until the delivery of the salmon to consumers. Using bar codes, they can keep track of each lot number and identify the egg from which each shipment of salmon is derived.
Who invests in these types of tools? “The big companies,” according to Pérez. When it comes to small and midsize companies, traceability requirements have become an entry barrier because of the cost of these technologies. “Traceability is a process that has a high fixed cost because you have to build information platforms for monitoring [the product life cycle]. Although you recoup that investment over the long term, it’s a hard thing for small and midsize companies to do.”
Medina agrees, emphasizing the growing awareness that traceability applications are significant. “There are many differences between big companies and small ones but there is an overall awareness now about the growing importance of traceability. There are some very clear examples of companies in the area of Bio-Bio that have had a great deal of success exporting their premium products.”
Pérez says that agribusiness companies in Chile have made significant progress in managing their exports. Nevertheless, he notes that many companies “continue to do things in the same old way,” especially small producers. “The big problem is the small producers who continue their traditional production process; that approach only makes the situation even more complicated.”
Another factor is the maturity level of Chilean companies. Generally speaking, Chilean companies do not apply internally the competitive advantages that they can obtain from utilizing traceability tools. “From the point of view of engineering, we have seen that companies still do not clearly understand the benefits that can be derived from implementing traceability systems,” notes Tomás Burón, managing director of Burón S.A., a company that provides electronic traceability systems. He adds, however, that once the demands of the international marketplace increase, “there will be great demand” [for such technologies].
Chilean firms expect traceability requirements for exporters to become even more rigorous, according to Patricio Salgado, product manager at Demarka, a company that offers product identification technology based on labeling and bar coding. “Many companies make only those moves that they consider proper and necessary. That’s because they are not the sorts of companies that export to highly demanding international markets. Although some companies are planning to incorporate traceability into their processes, they are waiting until it becomes a strict requirement.”
Cultural Factor as Barrier
Jiménez believes that the cultural variable is an important barrier for smaller companies when it comes to adopting their own traceability tools. “Small companies are in a constant battle to survive, which keeps them busy on a day-to-day basis. Over the short run, traceability involves a change in the way products are tracked ‘from womb to tomb.’ Over time, this means doing things in a new way -- a change in the focus of your responsibility toward consumers. Practically speaking, companies will only adopt these tools if they fear that they are losing out on opportunities to enter new markets. More than a question of will and resources, traceability has to do with the role played by small enterprises. Conditions don’t permit [small companies] to have the time they need to evaluate and invest in the future, the way big companies can.”
According to Jiménez, certain organizational characteristics of small and midsize companies prevent them from recognizing the need for implementing such changes and innovations as traceability. “In small and midsize companies, the usual way to behave is to think short term. Unless the market for their products is getting smaller and if there is no law that penalizes them [for not implementing an innovation], small and midsize companies [SMEs] simply do not react. Generally speaking, SMEs confuse urgency with importance. For them, competitiveness is not an urgent consideration. What counts most for them is [the urgent need] to increase their cash flow so they can achieve sustainability.”
Pérez believes there is a way to deal successfully with the cost barrier: Bring companies with similar characteristics together and provide them with support from the public sector. The way for small companies to integrate their traceability systems and achieve greater competitiveness is for “companies with similar traits to get together.” Perez also points to governmental support through ProChile -- the country’s export promotion agency -- and CORFO, an organization that promotes development. For his part, Jiménez notes the growing popularity of ‘collaborative networks’ that help companies achieve those goals.
Collaboration, Pérez notes, is a way for small and midsize companies to obtain more information and to understand the critical impact that traceability has on the production of high value-added products. “You have to satisfy consumers who are increasingly well-informed. They want to know exactly how each product was processed, warehoused and transported to consumers. The old adage, which holds that markets need information to operate efficiently, is starting to be fulfilled.”
The consensus among academics is that the more information that is available about the chain of production, the greater the long-term return on investment for small and midsize companies. “Traceability is an opportunity for them to strengthen their commercial relationships with such developed markets as Asia and Europe,” says Medina. “Those are the markets where we must focus more of our resources. Other countries such as Malaysia and Vietnam (with whom China is currently negotiating possible free-trade agreements) have lower requirements when it comes to [tracing the] origin of food products.”
“With the signing of these additional free-trade agreements, Chile’s small and midsize companies will have only this option,” Jiménez predicts. “They need to understand that there are new rules for marketing, and traceability is one of those rules. Unfortunately, those companies that don’t realize that the world is managed by this new code will be driven out of the market.”
So long as small companies fail to mature or to pool their efforts and financing, they will not be the major players implementing the new reality known as ‘traceability,’ these experts note. Nor, they add, will small companies be able to take advantage of a ‘domino effect’ that could make Chile a power on the international food scene.