Vertical coordination in the Brazilian milk supply chain: the case of 3B Agro LTDA

Abstract

The dairy business is characterized by generally low profit margins due to a very competitive market environment. Dairy farmers and milk processing companies, therefore, constantly seek to optimize their technical production processes in pursuit of further cost reductions, e.g. by means of improving herd management, milking and feeding practices. In addition, innovative business strategies may create competitive advantage in response to market conditions. While vertical coordination or even integration have been established successfully in most sectors of animal husbandry including poultry, pork and beef production, this strategy is mostly limited to supplying contracts and input support within the dairy sector. Various organizational models of increasing vertical coordination in dairy production exist, with great variation in terms of operational performance and profitability. Using the example of 3B Agro LTDA’s dairy production located in the municipality of Toledo, Brazil, the case study illustrates the significant efficiency potential that currently exists in the Brazilian dairy supply chain. The prevalence of short-term contractual commitments and an influential role of independent intermediaries give room to considerable opportunism of market participants, various principal-agent problems and severe issues regarding milk quality. The case study illustrates that, vertical coordination can increase control and efficiency along the supply chain. It also points out the importance of strong managerial competencies and capabilities of dairy farm managers in order to exploit fully the efficiency potential provided by vertical coordination.