The beef chain in Costa Rica: Identifying critical issues for promoting its modernization, efficiency, and competitiveness

F Holmann, L Rivas*, E Pérez**,C Castro***, P Schuetz** and J Rodríguez***

International Center for Tropical Agriculture (CIAT) and International Livestock Research Institute (ILRI).
Cali, Colombia
F.Holmann@cgiar.org
*International Center for Tropical Agriculture (CIAT), Cali, Colombia
L.Rivas@cgiar.org
** International Livestock Research Institute (ILRI), Managua, Nicaragua
Edwin.ilri@cablenet.com.ni   ;   Paul.ilri@cablenet.com.ni
***Corporación Ganadera CORFOGA, San José, Costa Rica
cristina@corfoga.org  ;   Julio@corfoga.org

Abstract

The objectives of this study were to (1) describe the economic agents of the chain and their commercial and legal relationships; (2) identify the articulations between links, technological levels, indicators of efficiency, installed capacity (scale), and degrees of occupation; (3) characterize and estimate the costing and pricing structures, and the generation of value in different links of the chain; (4) identify those critical costs that can be modified through technological interventions, policy, or other activity; (5) determine the biological and economic risk factors throughout the chain; and (6) develop a methodology to identify and estimate the costs and benefits in each segment and evaluate the generation of value throughout the beef chain.

Data at the farm level was obtained from a national livestock survey (CORFOGA 2005b), which provided data on production systems, inventories, productivity, culling, and labor. In addition, surveys were carried out in different segments: (1) auction houses, (2) slaughterhouses, (3) butcher shops, and (4) supermarkets. The aim of these surveys was to describe behavior, determine risks and costs, and identify problems.

The weak dynamics of livestock production in Costa Rica are reflected in unsatisfactory productivity indicators. The annual gross income was estimated as US$44/ha for cow-calf operations, $126/ha for dual purpose (including income from milk sales), and $135/ha for fattening activities. Such income rates are considered extremely low, if one uses as reference the commercial value of land allocated to livestock production (ranging between $1000 and $2000/ha).

The aforementioned biological inefficiencies, combined with high land costs, impede the recovery of opportunity costs for the capital invested in land, thus making beef production uncompetitive. The cow-calf operation, with its low productivity, remunerates family labor with wages below the legal minimum. On the assumption that the only cash cost is that of labor, cow-calf farms pay family workers at a wage that is equivalent to 60% of the legal minimum.

Auctions present relatively good profits per event. However, when these profits are analyzed on a calendar-day basis, they are unattractive because of the low use of installed capacity. One strategy that would usefully improve the efficiency of the auction system in Costa Rica is its integration to reduce the number of fixed operational costs or encourage sharing of these houses so that administrative and operational personnel are rotated among the several existing auctions, taking advantage of the fact that they differ in their days of operation. This scheme would help reduce fixed costs and the commission collected without affecting profits, thus improving efficiency in this link of the chain. However, this option is not easy to implement, as auctions are run by private operators, whose various interests do not always coincide.

The industrial sector formed by rural and industrial slaughterhouses shows a low occupation of installed capacity, resulting in high operational costs and low labor efficiency. The total operational costs of slaughtering and dressing are estimated as being between US$32 and $66 per animal. If the estimated unit costs are compared with the rates charged per slaughtered animal (between $15 and $23), then we have to conclude that rural slaughterhouses work at a loss and that industrial slaughterhouses cover their operational costs with processing services and the very small profit margins from sales of byproducts.

The best performance in terms of efficiency and profitability is found in the retail sector of butchers and supermarkets. The rate of profits, expressed as the fraction of the final price paid by the consumer that remains in the butcher’s hands as remuneration of his work, ranges widely between 3% and 40%, with an average of 32%. If these profit rates are compared with those of other retail businesses, which are about 8%, then this type of activity presents excellent profit margins with relatively low risk. If, in addition, we take into account that this sector also offers the consumer a broad range of meat cuts from other animals such as pork and chicken, and processed meats, then profit margins are still higher.

The value generated throughout the chain, as a percentage of the final value of the young steer at retail price according to activity, is distributed as follows: fattener (34%), retailer (33%), breeder (19%), slaughterhouse (7%), transporter (6%), and auction house (1%). As observed, the distribution of value throughout the beef chain is totally inequitable and incongruent with the level of individual risk confronted by the actors who form it. The inequity observed in the distribution of added value reflects a clear dominant position in the market of some actors of the chain, which enables them to capture a very high fraction of the profits.

The value generated in the chain, adjusted for operational time in each link, ranges between US$0.28/animal per day for the breeder and $45.85/animal per day for the butcher. Thus, the highest proportion of the total added value concentrates on the final link of the chain. The butcher or supermarket obtains, on the basis of one animal in the same unit of time, 164 times more value that the breeder located in the first link of the chain. The latter has to confront biological and economic risks not covered by insurance policies, whereas retailers may mitigate risks through insurance policies for their raw materials, equipment, and infrastructure.

The competitiveness of the beef chain is the aggregate of the efficiency and productivity of all the links that form it. In a situation where, in the final segment, the demand for beef is low and weakly dynamic, then economic signs of modernization and the technological change it promotes, are not being generated in other components of the chain, particularly in the first link of production. This, in turn, results in a vicious cycle, generating low productivity and lack of competitiveness.    To promote technological change, efficiency, and competitiveness in the value chain for beef in Costa Rica, we propose the following six recommendations:

1.      That successful experiences of other chains such as that of poultry be analyzed and learned from to identify strategies that would increase the efficiency of the beef chain as a whole.

2.      That strategies for promoting the milk production of breeding cows be developed to increase family income, as remuneration of labor is currently below the minimum wage. This option would be viable only in localities where a milk market exists.

That livestock producer funds [a livestock producer fund consists of granting livestock in company to produce meat, provided that the producer concerned has adequate pastures for this purpose on his farm] be created as mechanisms to develop social capital, reduce transaction costs, and help improve the chain’s productivity and profitability. These organizations would bring together the different classes of the chain and favor synergies in the interaction of public and private actors.

3.      That incentives be created to promote the large-scale adoption of already available improved forage species, as most of the problem of low livestock productivity originates in poor and deficient feed. This strategy would emphasize feeding during dry seasons, thereby minimizing seasonal weight losses in the national herd and improving the profitability of farms.

4.      That a carcass classification system be established, based on quality and price that would permit differentiating supplies for different segments of the market.

5.      That consumer education be promoted on the health benefits of beef, forms of preparation, and differentiating between cuts, uses, and qualities of beef products.

Key Words: Beef value-chain, competitiveness, consumer, marketing, productivity, quality

Introduction

In Costa Rica, livestock represents the most important economic activity within the agricultural sector, accounting for 31% of the sector’s gross domestic product (GDP) and 11% of the national GDP (CORFOGA 2005a). It is a strategic activity in that it supplies food staples for the population. Its linkages with other sectors of the economy give rise to multiplier effects in terms of employment, income generation, foreign exchange, and general economic growth.

Likewise, livestock production occupies a major fraction of available land resources, as 69% of agricultural areas are found under permanent pastures (FAO 2005).  Livestock production in Costa Rica is distributed throughout all thermal floors, ecosystems, and regions. This fact generates significant environmental externalities, as inappropriate use of the soil degrades its productive capacity, affecting a very large part of the country’s agricultural lands. Over the long term, poor soil management results in low productivity and sustainability of production systems and in strong pressures towards occupying lands that are unsuitable for livestock. Nevertheless, many livestock production farms, unlike those dedicated to monoculture for export, certainly use practices to improve the sustainability of resources by using live fences, planting trees within pastures, protecting water sources, and planting improved forage species that increase cover and prevent deterioration of soils.

For cattle production, major contrasts can be observed. On the one hand, the dairy sector is markedly dynamic, its production having grown without interruption over the last 20 years at an annual rate of 2.5% (Cámara Nacional de Productores de Leche 2005). On the other hand, the beef sector has clearly declined from the mid‑1980s, with production decreasing by an annual 0.1% over the last 20 years, despite the cattle inventory declining from 2.3 million head in 1985 to 1.1 million in 2004 (CORFOGA 2005a).

Aside from the technological and economic problems that oppress the agricultural sector, state support has declined notably. State investment fell from 5% of the national budget at the beginning of the 1990s to 1.5% at the beginning of the current decade (CORFOGA 2005a). Within this general context, agricultural credit has deteriorated markedly. In 1990, it represented 15% of the total placements (4% in livestock) but, in 2002, it had fallen to 5%, with 1.7% granted to livestock production.

Most of the problems in the area of primary production stem from imperfections and deficiencies in other links of the chain. Accordingly, if an efficient, competitive, equitable, and sustainable livestock development is to be promoted, the efficiency of the chain as a whole must be improved, ensuring that the benefits of modernization are distributed equitably throughout all its segments.

A central hypothesis of this study is that the crisis of beef production in Costa Rica is a result of multiple causes originating in the first sector of production, in other links of the food and agricultural chain, and in external factors, including economic policies. We therefore reviewed and conducted an integrated and contextual analysis of all the chain’s components to identify the critical points at which technological interventions and economic policy would be more efficient in accelerating the sector’s modernization.

Objectives

General

To characterize and analyze the beef chain in Costa Rica. The goal is to generate strategic information that would help establish priorities and implement lines of action for those in public and private sectors who are in charge of promoting technological change and competitiveness of the nation’s livestock agro-enterprise. We also aimed to gain experience in developing analytical instruments for application in similar studies in other countries of Central America.

Specific

The specific objectives of this study are to:

1.      Describe the economic agents of the chain and their commercial and legal relationships;

2.      Identify the articulations between links, technological levels, efficiency indicators, installed capacity (scale), and degrees of occupation;

3.      Characterize and estimate costing and pricing structures and the generation of value in different links of the chain;

4.      Identify those costs that are critical, and can be modified through technological interventions, policy, or other activity; and

5.      Determine the biological and economic risk factors throughout the chain.

Materials and methods

Data

A combination of primary and secondary information was collected to describe, characterize, and analyze the different segments that form the beef chain of Costa Rica. Basic information on the production sector comes from various secondary sources that have conducted diagnoses, and analyzed the livestock trends and situation in the country. Information was also available from a national livestock survey (CORFOGA 2005b), which provided data on production systems, inventories, productivity, culling, and labor.

To analyze other links of the chain, primary information was compiled from actors of the same, in terms of volumes of operation, installed capacity, production of products and byproducts, costs, buying and sale prices, modalities of negotiation, risks and losses, client type, and number of intermediaries.

Surveys were carried out in May 2006 in different segments: (1) auction houses, (2) slaughterhouses, (3) butcher shops, and (4) supermarkets. The aim of these surveys was to describe behavior, determine relationships, estimate costs, and identify problems. In no case, were statistical inferences made. The surveys were accordingly directed at the principal actors, previously identified, and to skilled spokespersons, qualified to understand and analyze the chain’s situation.

Five administrators from the 19 auction houses existing in the country were interviewed. For slaughterhouses, visits and surveys were made to El Arreo-CIISA, CoopeMontecillos, and El Valle that, together, account for more than 80% of the total slaughter. We point out that, even though we explained that the information requested was strictly confidential and would be used only to analyze general trends in the industry and not the particular situation of each plant, we could not obtain complete information. The entities considered that very sensitive themes of a private nature were being dealt with. The information involved was available only for the entity’s own decision making. Hence, any information we obtained from any given industrial slaughterhouse was accordingly partial. We also conducted interviews of three rural slaughterhouses to discover differences and similarities with the industrial slaughterhouses.

The distribution of end products to retail was more “atomized” than that observed for wholesale markets. In 2003, 1392 butcher shops existed, marketing 65% of the country’s beef (Barrionuevo and Associates 2003). Retail distribution was through butcher shops, with 60% of beef sales occurring in urban open-air markets, 35% in traditional neighborhood butcher shops, 4% in rural markets, and 1% in modern neighborhood butcher shops. Information was obtained from seven butcher shops, five being urban (three in neighborhoods and two in markets) and two being rural (both in markets) to adjust and broaden available information. These surveys were conducted directly with the butcher shops, with the valuable collaboration of CORFOGA officials.

About 35% of the distribution of meat to retail was through supermarkets, which themselves are grouped into chains.  Supermarkets visited were MegaSuper, Corporación de Supermercados Unidos (CSU), Periféricos, and Automercados. However, as with the slaughterhouses, many of the interview questions were regarded as highly sensitive. Again, the information obtained from this source was limited to a few general considerations. Accordingly, analyses refer more to butcher shops than to supermarkets as agents of this link in the chain.

Generating value added beef

To estimate and analyze the generation of value in monetary terms throughout the beef chain, we used the following illustrated equation:

AV = PC₂ - PB = CT₁ + AC + CT₂ + (PF₂ - PF₁) + CT₃ + TS + CT₄ + CR + MR    [1]

where,

AV      =          Added Value throughout the chain (per equivalent animal unit)

PB       =          On-farm price received by the breeder

PC₂       =             Final price paid by the consumer

CT₁      =          Cost of transport from the breeding farm to the auction

PA₁      =          Price on entering the auction

AC      =          Commission charged by the auction house

OA      =          Operational costs or expenses incurred by the auction house

MA      =          Operational margins of the auction house

PA₂      =          Price on leaving the auction

CT₂      =          Cost of transport from the auction to the fattening farm

PF₁      =          Price on entering the fattening farm

PF₂      =          On-farm price received by the fattener

CT₃      =          Cost of transport from the fattening farm to the slaughterhouse

PS₁      =          Price on entering the slaughterhouse

TS       =          Tariff per animal charged by the slaughterhouse

OS         =          Slaughterhouse’s operational costs

MS      =          Slaughterhouse’s operational margins

PS₂      =          Price on leaving the slaughterhouse

CT₄      =          Cost of transport from the slaughterhouse to butcher shops or supermarkets

PC₁      =          Price on entering butcher shops or supermarkets

OR      =          Retailers’ operational costs (butcher shops or supermarkets)

MR      =          Retailers’ operational margins (butcher shops or supermarkets)

PC₂      =          Final price paid by the consumer

Thus,

PA₁ = PB + CT₁                       [2]            

PA₂ = PA₁ + AC                      [3]

MA  = AC - OA                      [4]

PF₁ = PA₂ + CT₂                     [5]

PS₁ = PF₂ + CT₃                      [6]

PS₂ = PS₁ + TS                        [7]

MS  = TS - OS                        [8]

PC₁ = PS₂ + CT₄                     [9]

MR  = PC₂ - PC₁ - OR          [10]

Characterization of the Beef Chain

Structure of the Beef Chain

Primary production

The livestock sector of beef production shows deficient production performance, as reflected by declining rates of production (-0.1% per year for 1980–2004) and of the cattle inventory (-2.5% per year in the same period). Such rates contrast with the country’s population, which grew at an annual rate of 2.5% in the same period (Table 1).

As a result of the falling cattle inventory, areas under permanent pastures have also reduced significantly, dropping from 2.4 million ha in 1988 to 1.1 million in 2004 (Table 1). Because both factors were declining, the average stocking rate (heads/ha) remained relatively stable over the period (Table 1).

Nevertheless, the area planted with improved grasses grew at an annual rate of 23% during 1990–2003 (Holmann et al 2004) as a result of the dramatic increase in grass seed imports, mainly of the Brachiaria genus (45% per year during the same period). Although the adoption of improved pastures did not increase the average stocking rate, it may have indeed caused an increase in the average carcass weight, which rose from 0.6%/year between 1990 and 1999 to more than double (1.4% per year) during 2000–2005 (Table 1).

According to Pérez (2003), among the major problems that the beef sector in Costa Rica faces are:

(a)    A marked seasonality in forage production, which generates deficits of feed for livestock at particular times of the year;

(b)   The advanced age of beef cattle at slaughter (more than 3 years), which results in low culling rates. This problem is probably related to limitations in the livestock’s genetic base and to poor availability of forages with high nutritional value. Moreover, the lack of a classification system of carcasses according to quality discourages the production of animals of a younger slaughtering age;

(c)    The severe lack of mineral supplements, which is linked particularly with problems of forage availability and explains the low productivity indices and modest birth rates;

(d)   The problems caused by external and internal parasites, especially in animals growing under the dual-purpose system.

Risks in beef production

Livestock production is, by nature, long-term, encompassing different sequential phases over time. Figure 1 shows the process of beef production, from conception to slaughter. As can be seen, for 1.3 years (about 15.5 months), the producer has capital invested in land, work, livestock, and operational expenses, and receives no monetary return while the animal is in gestation.

The process starts with a mating period that takes about 6.5 months to ensure that the female becomes pregnant (12 months ´ 0.54 is the annual calving rate). This is followed by a pregnancy lasting 9 months.

The calf is born with an approximate weight of 35 kg and a commercial value of US$50. Its growth occurs over three phases: (1) before weaning, which lasts 8 months and has a mortality risk of 5%; (2) a period of growth that usually lasts an additional year, with a probability of death of 2%; and (3) fattening, which takes another year, with a mortality risk of 2%. Because they are very desirable for immediate marketing, fattened animals are at additional risk of theft, conservatively estimated as being about 3%.

In addition, in beef production, the annual replacement of cows and bulls should be considered. According to the last farm survey in Costa Rica (Table 3, CORFOGA 2005b), the annual replacement rate for cows is estimated at 2.4%, that is, 4.7% divided by 2, assuming that 50% of births are males. The rate for replacing bulls is estimated at 0.1% per year, assuming a ratio of 25 cows per reproducer.

In short, for each steer that is slaughtered, we must add 14% for mortality from birth to slaughter,