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 International Food and Agribusiness
Management Review 4 (2002) 413±421

The rise of private food quality and safety standards:

illustrations from Brazil$
Thomas Reardona,*, Elizabeth Farinab
a
Department of Agricultural Economics, Michigan State University, 430 Butter®eld Drive,
East Lansing, MI 48823, USA
b
PENSA, Universidade de SaÄo Paulo, SaÄo Paulo, Brazil

Abstract

Over the past decade, the private sector has rapidly built up an array of private food standards to
assure quality and safety in a ®ercely competitive market. These private standards have sometimes
been to ®ll in for missing public standards, especially for safety, and to differentiate products and
build reputation, for both quality and safety. Moreover, private standards are increasingly related to
meta-management systems assuring both quality and safety at all levels of a chain, enforcing and
certifying the implementation of process standards. The privatization of standards has been important
for both buyers and suppliers in the chain. They tend to be formulated and imposed by buyers
(retailers and processors), and are key to their cost control and reputation with consumers, thus
overall competitiveness. They are imposed on suppliers, who often ®nd that the standards imply very
substantial outlays for reporting, new equipment, and training. The luckyÐa relatively small subset
of the original set of suppliersÐtend to ®nd that meeting the standards, with formal certi®cation in
hand, bene®ts their business, opens new opportunities. The excluded tend to ®nd themselves relegated
to waning and unpro®table markets. The above points concerning the determinants and effects of
the formulation and implementation of private standards are illustrated with cases from the dairy,
coffee, wheat products, and coconut product chains in Brazil. # 2002 Elsevier Science Inc. All rights
reserved.

$
An earlier version was presented at the International Food and Agribusiness Association's 2001 Food and
Agribusiness Symposium, June 27, 2001, Sydney, Australia.
*
Corresponding author. Tel.: ‡1-517-355-1521; fax: ‡1-517-432-1800.
E-mail addresses: [email protected] (T. Reardon), [email protected] (E. Farina).

1096-7508/02/$ ± see front matter # 2002 Elsevier Science Inc. All rights reserved.
PII: S 1 0 9 6 - 7 5 0 8 ( 0 2 ) 0 0 0 6 7 - 8
414 T. Reardon, E. Farina / International Food and Agribusiness Management Review 4 (2002) 413±421

1. Introduction

Until recently, food grades and standards (G&S) were viewed (in policy debate and
research circles) nearly exclusively as public domain issuesÐnot as a subject strategically
relevant to private sector management. The focus on standards as public policy issues
was rooted in several factors. (1) Historically, standards have emerged with the rise of
markets for commodities, usually as public standards to reduce transaction costs and
increase ef®ciency, allowing expansion of trade. (2) Standards were viewed as public goods
necessary in the presence of imperfect and asymmetric information that causes market
failure. (3) The recent debates related to the WTO have focused attention on standards as
potential non-tariff trade barriers erected by governments to block imports competing with
domestic production.
This paper argues that in the new competitive context of liberalized, globalized food
markets, standards should be seen as major issues for private sector managers, just as they
already are for government policymakers. The importance of formulating private standards
for the competitiveness of ®rms downstream in the chain (such as in retail and processing) is
paralleled with the importance of meeting new private standards for the survival of suppliers
upstream in chains.
We begin with a general discussion of the reasons for the rise of importance of private
standards and then focus on illustrations from Brazil. The latter is because Brazil presents a
fascinating combination of rapid concentration in key product chains (and thus exit of many
small ®rms upstream and downstream) and rapid growth in the domestic and export food
economies. We think that the rise of private standards plays a key role in this ``boom with
exclusion'' food economy, and believe that it is important, for management and policy
reasons, to explain why. The paper thus proceeds from general discussion to illustration and
concludes with implications.

2. De®nitions

G&S consist of a collection of technical speci®cations, terms, de®nitions, and principles of

classi®cation and labeling. They include rules of measurement established by regulation or
authority (standards) and a system of classi®cations based on quanti®able attributes (grades)
(Jones and Hill). G&S pertain to: (1) quality (e.g., appearance, cleanliness, taste); (2) safety
(e.g., pesticide or arti®cial hormone residue, microbial presence); (3) ``authenticity''
(guarantee of geographical origin or use of a traditional process); and (4) the ``goodness of
the production process'' (e.g., with respect to worker health and safety, or to environmental
contamination).
``Performance G&S'' are the characteristics the product is expected to have when it
reaches a certain point in the agrifood chain, for example, the maximum amount of pesticide
residue permitted when apples are purchased from a grower by a processor. ``Process G&S''
concern the characteristics of the processes in the agrifood chain, from production of the raw
product, to processing into intermediate or ®nal goods, and distribution. For example, they
might specify that an apple be organically grown or that milk be stored/handled in certain
 T. Reardon, E. Farina / International Food and Agribusiness Management Review 4 (2002) 413±421 415

ways so as to keep the bacteria count below a threshold. HACCP standards are important
examples of process standards.

3. Hypotheses concerning the determinants of the privatization of standards

We hypothesize categories of determinants of the emergence of private agrifood

standards: (1) incentives to create private standards; (2) capacity to formulate and implement
them.

3.1. Incentives to implement private standards

First, in many places and for many products, the demand for standards to de®ne and
regulate markets has out-paced the growth of supply of public standards. Farina and Reardon
(2000) illustrate with examples from MERCOSUR (a trade bloc on the road to becoming a
common market, comprising Argentina, Brazil, Paraguay, and Uruguay). The newly
competitive context in the bloc in the 1990s (to the present) required a three-pronged
strategy of ®rms in order to survive. (1) Firms needed to differentiate their products and
identify niches. G&S were critical to that product differentiation. (2) Firms needed to
communicate product quality and safety to consumers or intermediate input purchasers.
Certi®cation and labeling schemes were crucial to the communication of the implementation
of quality and safety G&S. (3) To survive, a ®rm had to reduce costs while maintaining
quality. However, whereas private agrifood sector development cried out for G&S to
facilitate the strategy of competitive survival described above, the governments of
MERCOSUR, individually and collectively, lagged in the needed creation and harmoniza-
tion of G&S. Firms and associations had strong incentives to create and enforce private
standards and communicate them to consumers via labels and certi®cation in order to
capture rents from quality and safety and product differentiation. In some cases, public G&S
existed, but their form or speci®ed levels did not meet the needs of the private agrifood
system actors, and were perceived as hindering transactions. A typical situation is where the
gradations and attribute categories in the public G&S were too narrow and simple to permit
and facilitate the product and quality differentiation that the market was ripe to allow.
Examples are provided from Brazil in Section 5.
Second, standards are not merely public goods to resolve market failuresÐthey are
strategic instruments of market differentiation and market share and niche protection by food
companies (Reardon et al., 1999). The growth of their strategic role in the rapidly changing
food economy of the 1990s was paralleled in the theoretical literature by growing empirical
research in the vein of new institutional economics, with resurgent interest in established
theories of market capture and rent-seeking.
Third, private standards have become increasingly important as tools of chain
coordination, as meta-management systems (Caswell, Bredahl, & Hooker, 1998) to
implement process standards such as HACCP and quality process standards such as ISO
standards, at each level of the chain. This is done to cut costs and thus be competitive in a
liberalized market, and assure quality and safety.
416 T. Reardon, E. Farina / International Food and Agribusiness Management Review 4 (2002) 413±421

Fourth, the incentive for standards to be private is less the stronger is the public good
nature of the standard. In general, quality standards tend to be private goods and safety and
agricultural health standards, public goods. But there are important exceptions to this general
rule, in particular, in developing countries as follows.
In many developing countries, food safety and agricultural health standards are not
presentÐor if they are, are often not strictly enforced by public authorities. Yet the
reputation of private retail and processing ®rms depends on a safe product. Thus, there is an
incentive for them to create private or semi-private food safety standards and certi®cation
systems. An example is Carrefour in Brazil, with its Seal of Meat Quality and Safety (Nassar
& Jank, 2000). McDonalds in Brazil has private agricultural health standards for lettuce seed
that must be used by its lettuce suppliers. It is also the case with private milk standards in
Brazil, a case discussed below.
Moreover, large ®rms downstream in the chain often set-up ``meta-management systems''
that combine quality and safety process standards and certi®cation for the supplier ®rms
from the farm through the ®rst-stage processors. An example is that of the Nestle Quality
Assurance (NQA) system for coconut products in Brazil, a case discussed below.

3.2. Capacity to implement private standards

The main capacity variable appears to be the buying power of the ®rm. This can be strong
when the ®rm is giant and operating nationally and buying inputs widely, or it can be strong
when a ®rm is only medium or small but in a niche market with a restricted set of possible
suppliers of its inputs. An example of the latter are the new fresh-cut businesses in the SaÄo
Paulo area, buying greens, and cleaning, cutting, packaging, and delivering them to
supermarkets and fast food chains. They are not large or sophisticated but do set private
standards and have a strong effect on the practices of suppliers.

4. Hypotheses concerning the effects of privatization of standards

The establishment of G&S on an agrifood system can have several opposing effects. First,
G&S can increase the market size for a particular product, reducing barriers to entry so as to
allow the participation of more ®rms and the expansion of trade, thereby increasing
transaction ef®ciency and lowering transaction costs. They can do so either by de®ning and
facilitating a broad commodity market or by de®ning a set of differentiated products. Greater
market ef®ciency and broader participation of ®rms imply more competition, potentially
leading to lower consumer prices and better product quality.
The corrolary of the above is an expanding market means reaching more consumers. G&S
facilitate that by communicating and reassuring consumers regarding safety and quality, and
by identifying differences in products and gradations in quality of a given product, thus
adding diversity to the shopping cart. Examples from the Brazilian milk and coffee markets
are discussed below.
Second, ®rms and chains that implement standards can increase ef®ciency through better
intra-®rm and inter-®rm coordination and management. That increases pro®t rates, as
discussed by Mazzocco (1996) for the case of implementation of HACCP by U.S. ®rms.
 T. Reardon, E. Farina / International Food and Agribusiness Management Review 4 (2002) 413±421 417

Third, G&S establishment can decrease market size or limit the number of ®rms
participating, by increasing entry barriers through raising investment requirements for
participation. The investment requirements can range from upgrading management skills to
new equipment purchase to establishment of quality control and coordination systems. Such
investment costs can be very substantial relative to the means of small ®rms, and can force
their exit or their movement to a less pro®table market (Reardon et al., 1999). These effects
are illustrated in the Brazilian dairy case below.
Note that the above hypotheses about effects of G&S are not speci®c to public or private
standards. However, one can surmise that given the characteristics of private G&S that
produce the incentive to formulate them (that they are more differentiated and target market-
speci®c than broad public standards, and that they are in general more stringent), the above
effects can be hypothesized to be magni®ed in the case of private standards.

5. Illustrations from Brazil

5.1. Privatization of G&S for product differentiation: wheat products and coffee

For wheat products, during the 1960s±1980s, the Brazilian market was strictly regulated,
and there were only two grades of wheat ¯our in the public G&S. With market liberalization
circa 1990, domestic wheat milling ®rms (such as Moinho Paci®co and Pena Branca, the
case studies in Farina (1997)) were able to offer a variety of grades of ¯ours geared to the
needs of the bakeries. The millers created their own G&S system to supplant the public
system and re¯ect and create the incentives for product differentiation. However, the strategy
has turned out to bene®t imports, because wheat ¯our is an international commodity that has
an adequate and well known grading system that allows Brazilian milling companies or the
food industry (pasta, bread and biscuits) to globally source.
Similarly for coffee, in the second half of the 1990s, the Coffee Roasters Association of
Brazil (ABIC), as well as foreign ®rms such as the relatively small Italian ®rm Illycaffee,
promoted differentiation strategies based on blends of different types and grades of coffee
and used these to establish price differentials to create an incentive for coffee growers to
make the necessary investments in quality control. Again, the new private standards were
much more adapted to the needs of quality and variety differentiation than were the public
G&S (Zylberstajn & Farina, 1999).

5.2. Privatization of G&S for chain coordination and quality/safety assurance: Nestle and
SocoÃco in the coconut products chain

Farina et al. (2000) analyze the relation of NestleÂ-Brazil and its supplier of grated
coconut, SocoÃco, and the role of private standards for quality and safety assurance in that
relation. SocoÃco is among the largest and most modern coconut processors in Brazil and in
the world. By the late 1990s, SocoÃco supplied 80% of NestleÂ's input of grated coconut.
While Nestle is global and diversi®ed, SocoÃco is national and specialized, as well as
vertically integrated (primary production and ®rst-stage processing).
418 T. Reardon, E. Farina / International Food and Agribusiness Management Review 4 (2002) 413±421

Before 1991, Nestle used private performance standards and implemented its own
monitoringÐsubjecting samples of water, raw material, semi-manufactured products, and
®nal products to tests in its laboratories. The process was time-consuming and risky, but was
necessary due to lack of public standards and public monitoring.
After 1991, implementation of NQA increased quality and safety (to Nestle global,
private standards) and traceability, reduced risk, and drastically reduced the monitoring cost
of raw material quality from the certi®ed supplier. The monitoring cost dropped because the
inspection of the product no longer takes place at the Nestle factory, and Nestle can ask the
supplier for the results of its monitoring of the production processes for each lot of an item
sent to the factory.
SocoÃco was invited by Nestle in 1996 to take part in the system. By 1999, 3 years later, SocoÃco
had obtained full certi®cation for its full vertical chain, from coconut production or import
to ®rst-stage processing. The ®rm must assure product quality and safety, beginning with
coconut production, and ®rst-stage processing involving careful manual removal of the meat
(allowing no residues of shell ®laments that would discolor the grated coconut), dehydration,
adjustment of oil content and ®ber length, and packaging. Additional substantial effort is
needed for training workers and documenting operations. The process standard of NQA
is equivalent to a combination of ISO, HACCP, and good manufacturing practices (GMP).
The risk of the investments required of the grated coconut suppliers is that such
investments are characterized by high speci®city. Other purchasing ®rms do not require
these procedures and if the ®rm stops supplying NestleÂ, the investments will not have the
same value. The product of the certi®ed supplier is immediately received by NestleÂ, but the
supplier does not enjoy commercial price advantages or even a purchase guarantee. There is
no formal purchase commitment between the ®rms. There is no contract that guarantees
exclusivity of supply or preferential treatment in the purchase. If the price of imported grated
coconut is lower than that produced by the certi®ed supplier, Nestle can use the imported
raw material instead. Nestle can, indeed, certify competing suppliers, as is the case of two
®rms supplying labels and packaging, two for glass, and two for wheat ¯our (in addition to
another two undergoing the certi®cation process).
However, SocoÃco is only partially exposed to the above risks, as 75% of the coconut that
it processes goes into its own ®nal products bearing the SocoÃco brand name. Thus, the
majority of the investment in quality management can be appropriated by loyalty to the
brand name and by the cost reductions resulting from this process.
There are also risks for Nestle in imposing a costly certi®cation process, as it means
dependence on the few ®rms that can meet the requirementsÐhence its dependence on
SocoÃco is great. The second national supplier, DucoÃco, operates on a much smaller scale and
is not yet a certi®ed supplier. The spot market works with coconut of inferior quality
demanding traditional analysis procedures that cause delays in moving the raw material,
making it necessary to maintain stocks.
Given that certi®cation involves investment and adaptation costs, incentives are needed.
For Nestle itself, the strong motivation is in consistent quality and safety of the inputs, and
the cost reductions from ef®ciency gains. For a supplier such as SocoÃco, three main
incentives induce them to make the investments: (1) operation at a large-scale supplying to a
®rm with a large share of the market; (2) the creation of a general reputation for the ®rm,
 T. Reardon, E. Farina / International Food and Agribusiness Management Review 4 (2002) 413±421 419

based on the NQA certi®cation, which serves it well in the rest of the market, communicated
by advertising; (3) cost reductions from the increase in ef®ciency. The case study found that
SocoÃco perceived these bene®ts.
The Nestle±SocoÃco case study shows that: (1) cost and quality leadership call for the
imposition of stringent process standards focused on both quality and safety; (2) meeting
those standards imposes costs and risks on suppliers; (3) but imposer and imposee both
perceive substantial bene®ts in terms of ®rm and chain ef®ciency improvements.

5.3. Privatization of G&S to improve chain ef®ciency and assure safety and quality, with
exclusion effects: the case of dairy

Public milk quality G&S formulated in the 1950s were ®nally fully implemented in the
1970s by the private sector seeking market segmentation. Private standards for milk safety
formulated in the 1990s were used for both market segmentation and building ®rm
reputation. The cycle is today complete with the public sector taking up the private safety
standards and introducing them as public standards. Over those ®ve decades, standards
played a role in restructuring the industry and the market. The story is as follows.
Milk quality public standards (with grades A, B, and C), were formulated in the 1950s.
They were not implemented until the 1970s when milk processors and retailers began using
them for market segmentation based on quality, to take advantage of rapidly expanding
urban milk consumption and rising incomes.
In the 1990s, liberalization of foreign investment led to an in¯ux of foreign direct
investment and entrance of global dairy products ®rms such as Parmalat, Royal Numico, MD
Foods, and NestleÂ. Dairy product prices dropped (real retail prices for milk fell 40% over
1994±1997, while farmgate prices did not fall until 1997±1998). Yet consumer incomes were
rising. Hence the dairy products market burgeoned.
Stiffer price competition in dairy product markets led to the adoption of new strategies of
chain management. Leading processors, such as ItambeÂe (the largest Brazilian dairy coop
and second largest dairy processor), NestleÂ, and Parmalat, imposed new private standards for
milk producersÐfor both quality and safety. The private G&S specify milk refrigeration on
farm, and also specify volume and microbiological requirements (Jank, Farina, & Galan,
1999). The main objective of the dairy ®rms and cooperatives was cost reduction to meet
price competition. A better raw material quality reduces losses in industrial processing,
allowing large-scale transport and more ef®cient logistics. A secondary, but growing
motivation of the implementation of the standards is to communicate milk safety to the
consumers and avoid food safety scandals. The latter motivation is re-enforced by rapid
concentration on the retail side, with some 75% of the Brazilian retail sector now dominated
by a handful of large supermarket chains (Farina, 2000).
The above private standards implied large investments by dairy farmers. In only a half
decade the programs were fully implemented, and milk suppliers had to transport the milk
(cooled on farm) in bulk to refrigerated tanks at the receiving plant. This implied
investments along the chain, by farmers, truckers, and receiving plants. The investments and
changes in practices often exceeded the education, technical training, and ®nances of small
dairy farmers, and the result has been the exclusion of thousands of dairy farms from the
420 T. Reardon, E. Farina / International Food and Agribusiness Management Review 4 (2002) 413±421

chain in the past decade. Dairy companies had provided capital and some technical
assistance to dairy farmers; however, they were aiming for a situation of fewer and larger
milk suppliers and targeted their assistance accordingly. While the excluded suppliers are
mainly small ®rms, they also include beef/milk producers or the beef producers who sell
milk during the high season. The Brazilian experience is not unlike the U.S. experience
decades earlier, when the introduction of refrigeration tanks led to a large and rapid decline
in the number of milk producers and of farms with milk cows.
Of course, milk refrigeration produces bene®ts for the surviving dairy farms. The farmer
tends to become more sensitive to price variations, though more ef®cient. To use the
refrigeration tanks to capacity, the farmer is induced to make a series of changes and
investments, starting with a second manual milking, then the adoption of mechanical
milking, then improvements in animal genetics. The technological upgrade requires a
continuous managerial upgrade as well.
To protect the consumer more widely (beyond those bene®ted in the 1990s by the
implementation of the private standards in most of the milk market served by the formal
sector), the Brazilian government is implementing public standards that follow the lines of
the private standards. Essentially this means that the safety standards will need to be
followed by the ®rms currently operating in the huge informal market (30% of milk
consumption). That market has been beset of late by a number of food poisoning scandals
and fraud. The Brazilian government recently created the Sanitary Inspection Agency whose
main objective is to monitor food and drug safety. New regulations for milk product safety
are part of the general effort involved in the ``Milk Quality Improvement Program''. The
legislation will make the current private standards public, requiring refrigeration at the farm
and transport system levels.
However, the extension of safety standards to the ®rms now operating in the informal
sector will face challenges. These include lack of universal rural electri®cation and
insuf®cient laboratories to test for quality attributes required in the legislation under debate.
A public standard will also mean that small farms and ®rms that ``escaped'' into the informal
sector will now have to make the same costly investments made by the surviving ®rms that
had adapted in the 1990s to the private standardsÐand that may well mean a new wave of
small players exiting from the market.

6. Conclusions and implications

In the past several years, during heated debates around the WTO and public food
standards, the private sector has rapidly built up an array of private food standards to assure
quality and safety in a ®ercely competitive market. These private standards have sometimes
been to ®ll in for missing public standards, especially for safety, and to differentiate products
and build reputation, for both quality and safety. Moreover, private standards are
increasingly related to meta-management systems assuring both quality and safety at all
levels of a chain, enforcing and certifying the implementation of process standards.
The privatization of standards has been important for both buyers and suppliers in the
chain. They tend to be formulated and imposed by buyers (retailers and processors), and are
 T. Reardon, E. Farina / International Food and Agribusiness Management Review 4 (2002) 413±421 421

key to their cost control and reputation with consumers, thus overall competitiveness. They
are imposed on suppliers, who often ®nd, as we showed with examples from dairy and
coconut product subsectors in Brazil, that the standards imply very substantial outlays for
reporting, new equipment, and training. The luckyÐa relatively small subset of the original
set of suppliersÐtend to ®nd that meeting the standards, with formal certi®cation in hand,
bene®ts their business, opens new opportunities. The excluded tend to ®nd themselves
relegated to waning and unpro®table markets.
The implications for policymakers, NGOs concerned with producers and consumers, and
managers of retail and processing ®rms, are: (1) the system of private standards should be of
keen interest, at least as much as public standards; (2) suppliers should gear up for
substantial investments to meet stringent private standards or be excluded from supply
chains; (3) scaling-up private standards into public systems will face important challenges
related to access to capital (such as electri®cation) in poor areas, and to administration and
enforcement and incentives provision.

Acknowledgments

We thank two anonymous reviewers and Andrew Starbird for their comments.

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