Vertical coordination and sanitary control measures in the French young bull sector:
a transaction cost analysis
A. Poizat1, S. Duvaleix-Tréguer2, F. Bonnet-Beaugrand1
Affiliation
1
BIOEPAR, INRA, Oniris, La Chantrerie, 44307, Nantes, France
SMART-LERECO, AGROCAMPUS OUEST, INRA, 3500, Rennes, France
22
Mail address corresponding author: [email protected]
Abstract (100 mots maximum)
The French young bulls sector presents very diverse vertical coordination patterns. This evolves from
perfect spot market, when cow-calf producers sell weanlings on livestock markets, to perfect vertical
integration, when farmers produce weanlings they fatten. This mixed system of vertical coordination
differs from other live products sectors (e.g. poultry). In addition, it has sanitary implication. The
more weanlings are mixed and encompass long transportation, the more they will develop bovine
respiratory disease (BRD) at the beginning of the fattening.
There exist two challenges, relying both on economic and public health issues. We aim at understand
how and why is the young bulls sector shaped this way and understand how sanitary issues are taken
into account in transactions.
The transaction costs theory allows a global vision on transactions and explains vertical coordination
patterns according to economic environmental characteristics. This framework allows the analysis of
field observations and semi-structured interviews to explain transactions’ patterns and the role of
sanitary issues in transactions.
Transaction costs analysis of collected material is rather confirming the concordance between the
theory and the vertical coordination patterns observed on field. However, this also underlines the
lack of importance of sanitary issues in transactions. Not considered as a risk, uncertainty, or quality,
sanitary attributes of weanlings are neglected by cow-calf producers, middle men and fatteners. This
could be linked to the existing coordination patterns and lead to systematic antibiotic use, which
should be banned because of public health concerns on antimicrobial resistance.
Key words
Transaction costs – French young bulls sector – bovine respiratory disease – vertical coordination –
sanitary control measures – reduction of antibiotics
1. Introduction
Bovine respiratory disease (BRD) is a widely spread disease in the young bull sector. Up to 80% of the
French young bulls’ herds can develop the disease (Timsit et al., 2013). BRD triggers clinical signs such
as growth delay and sometimes death at the beginning of the fattening period of young bulls (Hay et
1
al., 2016). To control BRD and prevent economic losses, antibiotics are often prescribed in a
preventive and systematic way. However, the efficiency of antibiotics is partly decreasing, due to
antibiotic overuse in the young bulls sector (Gautier-Bouchardon et al., 2014). This biologic
phenomenon is a larger and growing concern worldwide (Laxminarayan et al., 2013; OECD, 2014).
Reducing antibiotic use is thus of paramount importance for public health to limit the spread of
antimicrobial resistance. Therefore, systematic and preventive antibiotic use should be banished.
Public regulator and stakeholders of sector need to have elements to influence a positive transition
in antibiotic use to control BRD.
In the young bulls’ sector, the current antibiotic practices can be linked to vertical coordination
issues. Indeed, the production of calf (in farms raising cow-calves) is separated from the fattening of
young bulls (in fattening units). This organisation implies intermediary transactions of weanlings,
which increase risks factor to develop BRD (confinement, transport, stress, mixing of weanlings…).
Middlemen ensure the matching of the offer with the demand. Most farmers and middle men are
independent, with very little contracting habits (less than 20% of the sector (Marty et al., 2015)). This
lack of vertical coordination sharply reduces the sharing of information between stakeholders. This
coordination pattern differs from other animal production sectors which developed market
institutions with commercial contractual agreements or even stronger vertical coordination (e.g. pork
production; broiler production) (Antoine et al., 2014; Hendrikse, 2007; ITAVI, 2013). It is thus crucial
to examine how vertical coordination in the young bull sector influences the use of antibiotics. Many
transactions concluded in this system and a wide range of vertical coordination governance co-exists,
from spot market (livestock market) to vertical integration (cow-calf and fattener producers). In this
paper, we examine how stakeholders include the sanitary commercial value of weanlings in their
transactions using the transaction cost theory. We consider the sanitary value of young bulls as
quality information. We explore the determinants of governance structures for transactions in the
young bulls sector to identify what shaped the observed vertical coordination patterns and how the
sanitary practices are taken into account in those transactions.
As Lafontaine and Slade described, “transaction costs are the costs of establishing and administering
business relationships with and between firms or individuals, including those costs associated with
opportunistic behaviour and haggling ex post” (Lafontaine and Slade, 2007). This economic theory
has been used to describe and analyse similar agricultural contexts (Boger, 2001). According to the
transaction cost economy (TCE) described by Williamson, transaction costs (e.g. assets specificity,
complexity, uncertainty, information availability and frequency of transactions (Williamson, 1994))
explain vertical coordination patterns. This theory argues that decreasing transaction costs is a
determining factor to determine vertical coordination patterns (Hernandez-Espallardo et al., 2012).
The TCE predicts that the success of a certain shape of governance is representative of its efficiency
(Bijman, 2006) and minimise transaction costs.
The paper is structured in five sections. Section 2 describes the French young bull sector, focusing on
French specificities and its main characteristics, we describe how we get the information and the
data at the end of Section 2. Section 3 reviews the literature on transactions costs theory and present
the main results on the agricultural sector. Section 4 examines how the transaction cos theory helps
us to understand the vertical coordination pattern in the young bull sector and how the vertical
coordination schemes influence the sanitary practices in this sector. Section 5 concludes.
2
2. Determinants of transaction costs in the agricultural sector
The transaction costs economy has been first initiated by Coase and then developed and enriched by
Williamson and other economists in the nineties. This theory aims at understanding the commercial
governance patterns according to the economic environment in a context of bounded rationality and
opportunism of stakeholders (Citer Williamson).
2.1.
TCE general framework
The TCE includes different elements of the economic environment to explain the choice of a
governance system.
The economic environment is defined by nine parameters: complexity, availability of information,
uncertainty, frequency of transaction, specific human assets, specific physical assets, dedicated
assets, geographic specificity and temporal specificity (Lafontaine and Slade, 2007; Williamson,
1994). The specificity of an asset means that if this asset were to be used in another transaction, it
would lose some of his value, it would generate costs, or it would decrease productivity.
According to Williamson, assets specificity is highly important to determine the shaping of
governance transactions (Figure 1). k represent assets specificity. Williamson predicts that with no
specific assets (k=0), the spot market will be the best governance system. However, if specific assets
are engaged in the production process (k>0), there is a need for more vertical integration to avoid
situations of quasi-rent associated with ex-post renegotiations and opportunism (Lafontaine and
Slade, 2007). In the case of k>0, (i) or the level of safeguards remain inexistent (s=0, B) and prices are
higher than in the A situation; (ii) or safeguards of transactions are developed (s>0) with the
implementation of contractual agreements and other insurance systems (C), or with the
implementation of even more stronger vertical integration: backward (or forward) integration of the
firm (D).
Figure 1: The contracting scheme, adapted from Williamson
Empirical evidences largely confirm the predictions of Williamson’s theory. Indeed, Lafontaine and
Slade (2007) in their literature review showed that specific human assets, specific physical assets,
dedicated assets, geographic specificity and temporal specificity had all significant influence on
increased vertical coordination.
When there is complexity and/or uncertainty in addition of specific assets engagement, this
complicate the construction of complete contracts. This configuration is in favour of more ex-post
3
renegotiation and opportunism. However, empirical studies show more diverse effects of complexity
and uncertainty on vertical governance pattern. Indeed, 8 studies show a significant positive effect of
complexity on vertical integration, one study shows a significant negative effect and another one a
significant U-shaped effect (Lafontaine and Slade, 2007). Regarding the influence of uncertainty, 3
studies show a significant positive effect on vertical integration and 2 others show negative but nonsignificant effect on vertical integration (Lafontaine and Slade, 2007).
2.2.
TCE predictions applied in the agricultural sector
2.2.1. Negligible importance of geographic specificity, physical and human assets
specificity in agricultural sector
In agricultural sector, human assets and geographic specificity are considered here to be negligible.
Indeed, the human assets, constituted of farmers’ knowledge and skills (Ortmann and King, 2007),
are usually considered to be re-deployable in agriculture (Traversac et al., 2011).
2.2.2. Paramount importance of market risk in agricultural sector
The risk for a given firm can be declined into five main types: market (e.g. fluctuations of prices),
production (e.g. animal disease), human (e.g. workplace accident), financial (e.g. too high investment
burden), and institutional (e.g. changes in regulation). However in Agriculture, the risk environment
of farmers is increasingly linked to increased market fluctuations. Market fluctuations depend on
increased globalization of markets and industrialisation. International markets are varying a lot on
monthly and yearly basis, increasing risks incurred by farmers (Hardaker, 2001). Studies show that
most important risks perceived by farmers are linked to yields, input and output prices, even if
variations are important between individuals (Hardaker, 2001).
Assets are of specific nature if they cannot be redeployed to alternative uses without sacrificing
productive value. They are safeguarded if farmers perceive an adapted level of return on their
investment in these assets (Hernandez-Espallardo et al., 2012). Specific assets are an important
source of risk in agricultural sector (Traversac et al., 2011). The importance of specific assets in
agriculture combined with importance of market risks is in favour of more vertical integration
because market fluctuations endanger returns on investments (Fernandez-Olmos et al., 2009).
However, in the European and French context, farmers’ income is supported by the Common
Agricultural Policy (CAP). There is no longer direct control on prices, but there is a substantial
financial support to agricultural support. This tempers the risks linked to market fluctuations. But
subsidies are very unequal depending on the considered sector.
2.2.3. High complexity and uncertainty in agricultural markets
In a given sector, the complexity is linked to difficulties in handling a wide number of intermediate
production steps and routine organisation to produce a product (Mesquita and Brush, 2008).
Uncertainty is linked to the characteristics of products exchanged. On the contrary to the risk,
uncertainty cannot be measured and cannot be integrated in calculation of transaction costs.
As exchanging living animals, uncertainty is of paramount importance. Indeed, the future potential
growth of animals is uncertain and is depending on past, present and future events, a disease for
instance.
The uncertainty of transactions is also linked to market fluctuations. They are important in
agriculture. They depend on seasonal variations that can be predicted, but also on international
4
quotations that are unpredictable. In that case, if the uncertainty level is too high, there is no
incitation to implement specific investments. Farmers will rather transact on spot markets because of
too high costs of stronger level of coordination (Boger, 2001).
The TCE presents complexity and uncertainty as two elements who complicate the construction of
complete contracts and their reinforcement over the duration (Lafontaine and Slade, 2007).
The increased complexity and uncertainty is not in favour of strong vertical coordination. In such a
context, there is either less monetary risk in having many marketing channels to sell one product
(Chen et al., 2004), which is in favour of spot markets; or preference for integrated firms (Boger,
2001). In addition, the uncertainty linked to prices on market fluctuation is not in favour of long-term
relationships (Coronado et al., 2010). Stakeholders do not want to restraint themselves with
contractual agreements. Uncertainty has also often negative effects on trust, which is a very
important element to develop long-term relationships (Geyskens et al., 1998).
2.2.4. The importance of quality in transactions
The quality of products is a very important characteristic in TCE as it interacts with vertical
coordination choices (Goodhue et al., 2003). Quality refers to the level of desirable characteristics of
a product. Quality depends on the producer’s effort, but also on random effects (Boger, 2001;
Hernandez-Espallardo et al., 2012). In agriculture, when exchanging living products such as animals,
random effects are of particular importance (e.g. disease, feed nutritional values, and environmental
conditions). In addition, quality level is difficult to measure. The weight of animals could be a good
proxy (Boger, 2001), but is not sufficient to describe all intrinsic characteristics of the animal.
Taking quality into account allows a differentiation of products, motivates investments and more
vertical coordination. However, if the quality is difficult to measure, having premium prices for
quality might be costly to implement and control (Goodhue et al., 2003). However, when the quality
of products is difficult to control, the system is rather in favour of more vertical coordination and
long-term relationship (Goodhue et al., 2003; Raynaud et al., 2005).
If quality is rewarded by price premium, this motivates farmers to invest to improve the quality of it’s
products, for example animal feed quality, managerial practices (Boger, 2001). However, if the
quality is not taken into account on transactions, suppliers do compete on volumes and price but
there is no price premium for quality (Soler, 2002). There is no incentive to increase efforts to
produce higher quality; costs will be reduced to minimum. This create adverse selection for farmers
producing high quality and they will leave the market (Boger, 2001).
2.2.5. Information asymmetry and shared responsibility for performance
Transaction costs are higher when the responsibility for performance is shared between
stakeholders, in addition to no available indicators for quality, performance, and standards
(Hernandez-Espallardo et al., 2012). In agriculture, when animals are exchanged during their rearing,
performances of animals are depending on previous rearing stages. In this cases, interdependence
are strong.
In present agricultural context, asymmetry of information is important and is more in favour of
middle men having a good market knowledge. Farmers are less informed on market trends because
they mostly focus on production issues. This expose them to information asymmetry and distortion
of information (Hernandez-Espallardo et al., 2012).
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2.2.6. Importance of temporal specificity in agriculture
Temporal specificity is a characteristic of transactions that has been introduced recently in the TCE
and is a particularity of the agricultural sector (Ollila, 1988; Ortmann and King, 2007). This element is
relevant in sectors working on perishable products (e.g. fruits, meat,…). This parameter is for
instance important in the poultry sector as the cycle of production is of 62 days. In addition,
characteristics of products (size, weight) are very standardised and slight difference of the products
with standards requirements induce financial penalties. This is thus in favour of more vertical
integration because the strong temporal specificities which do not allow one day of delay in the
vertical coordination.
3. Vertical coordination in the French young bulls industry
The young bull’s production is a sector dedicated to beef meat production. When estimated in
Livestock unit (LU) of cows, France is the first country in Europe (E-27) to raise young bulls. It
represents 33,1 millions of LU, 33,1% of the European suckling beef livestock (Roguet et al., 2015).
The young bulls sector produces two kinds of animals: weanlings (male beef between 6 to 8 months)
and young bulls (male beef younger than 24 months). French consumers do not consume most of the
weanlings and young bulls produced because of their preference for redder meat. Approximately
25% of weanlings are exported to Italy and Greece, less than 20% are fattened in France (Marty et al.,
2015). Most of young bulls’ meat is exported to Italy, Germany and Greece.
There is in France approximately 120 000 farms with more than 5 suckling cows. Many actors are
stakeholders of the value chain because they raise, sell or fatten weanlings (Timsit et al., 2011).
There is a lack of evolution of the level of coordination. This is differing from other meat production
sector (poultry, pork), where the importance of spot market strongly decreased (Hendrikse, 2007)
and main stakeholders did coordinate within cooperatives and private actors (S. James Jr et al.,
2011). The coexistence of spot markets and contracts is one of the characteristics of bovine sector
(Hendrikse, 2007). In the young bull sector, contracts are used at a particularly low level (less than
20%) (Marty et al., 2015).
3.1.
Micro-scale organisation of the young bulls sector
The sector is poorly coordinated; farmers are independent and own their animals. Different systems
of vertical coordination coexist (Figure 2). First, young bulls might be raised until slaughter in the
same farm (cow-calf and fattening system), this organization is minority. Second, young bulls might
be produced at a cow-calf producer unit and then sold with the help of middle men at the age of 7 to
9 months (weanling) to a fattener. “Middle men” is a generic term which includes all livestock traders
of the sector. They play a paramount role: they match the offer of cow-calf producers with the
demand of fatteners. The demand of fatteners is rather regular. They need batches constituted of 8
to 12 weanlings to be then fattened in the same box. They look for weanlings having the same body
condition and the same size. In doing so, they can fatten weanlings during the same period and
control the optimal filling of their buildings more easily. However the offer of cow-calf producers is
more irregular, depending on seasons and varying on weakly basis. First the matting of cows is
naturally seasonal and the weanlings market is more saturated in autumn. Second, the matting of
cows is still mostly done by natural servicing. Breeding synchronisation programs are thus difficult to
implement. As a consequence, cow-calf producers rarely sell ten weanlings the same sale, but rather
6
2 to 3, in order to propose batches with weanlings having similar characteristics (age, weight, and
size). Ecrire ici que c’est le premier enjeu sanitaire (mélange d’animaux de différents élevages)
Figure 2: Existing vertical coordination systems to raise young bulls
To match the demand of the fatteners with the supply of the cow-calf producers, middle men buy
and sell weanlings in farms, at livestock markets, and between themselves. Important commercial
structures have got a sorting centre to gather weanlings and dispatch them according to fatteners’
orders. These structures give the necessary delay to construct batches according to the offer and to
the demand of the week. They are of paramount importance for these structures because they often
have many suppliers (cow-calf producers) and many fatteners as clients. They can handle logistic
issues thanks to sorting centres.
Middle men might belong to POC, PONC, slaughterhouses or be independent, but their belonging
structure doesn’t impact their daily work.
Production organisation of a commercial nature (POC, including cooperatives) and production
organisation of non-commercial nature (PONC) are partly structuring the market.
POC are commercial organization buying and selling weanlings and young bulls for their members.
They aim at providing services to their members (Cechin et al., 2013). Middle men are employees of
the cooperative. Cooperatives have very specific rules of governance, their targets should meet their
members’, and benefits are distributed depending on use or patronage (Hernandez-Espallardo et al.,
2012). In France, there is 56 POC having activities in the bovine sector, including the young bulls
sector. Agricultural cooperatives are gaining market shares. However, the constraints imposed to
their members are negligible and they use the same complex micro-scale ways of commercialisation
(Figure 3).
Figure 3: Macro-scale structures of young bulls' sector
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PONC are non-for-profit organisations. The French regulation limits the number of PONC to one per
department. But there might be less than one PONC per department if they gathered their
organisation and work at a regional scale for example. In France, there is 34 different PONC. They are
an interface and aim at facilitating the trade of animals between cow-calf producers and middle men,
middle men and fatteners, and fatteners and middle men. There is three major differences between
PONC and POC: (i) PONC work both for middle men and farmers interests, when POC work for
farmers’ interests only; (ii) PONC do not employ middle men, they only subscribe to be in the PONC.
POC employ middle men; (iii) the previous point explains that PONC do not buy nor sell animals,
when POC do buy animal for transactions. PONC are interfaces that gather stakeholders which might
have common interests. When entering the association, farmers are engaged to sell at least 75% of
their animals to middle men of the PONC. However this constraint is not coercive and this
functioning still provide many commercialisation possibilities for farmers, due to the large number of
middle men which adhere to the PONC.
Our observations let us suppose that except when there is a contractual agreement, farmers’
adhesion to POC or PONC doesn’t change much commercial paths used. Farmers always have a
choice to buy and sell their animals with different middle men: without contracts, commitment is
limited. Moreover, sanctions in case of commitment defections are not dissuasive, if ever existing.
And finally, employed or independent middle men work through the same commercial paths. The
governance structure thus seems to be inefficient to structure the young bulls sector.
3.2.
Consequences of vertical coordination on young bulls performance
and bovine respiratory disease
Stakeholders of the young bulls sector work as a team production. This means than individuals
working together are more productive than when each one works alone (Lafontaine and Slade,
2007). Indeed, if performances of the young bulls during fattening period depend on the know-how
of fatteners, they also highly depend on the raising history of the weanlings. The raising history of the
weanlings includes, from birth to the beginning of the fattening: (i) easiness of birth, feeding
practices, vaccination, sanitary events (diarrhoea, BRD,…) at the cow-calf producer’s farm; (ii)
duration of transportation, number of weanling mixing, number of intermediaries,… during transfers
through middle men. Therefore, in the present situation, the vertical organization of the young bulls
sector is creating technical interdependency of the fattener compared to the upstream of the sector.
The technical interdependency of the fattener is particularly strong if we consider BRD risks. Indeed
the repartition of risk between stakeholders is very unequal. The risk to develop BRD is only held by
fatteners. However, the vertical organisation of the young bulls sector is generating numerous mixing
of weanlings. Mixing of weanlings and long transportations are in favour of bovine respiratory
diseases (BRD), because they enable microbial exchanges, they induce confinement and stress. The
longer exchanges are the stronger become the risks to develop BRD. Sorting centres and livestock
markets are places where microbial exchanges are particularly favoured. In fattening units, the more
diverse is the origin of cow-calf farm in a given batch, the stronger is the risk to develop clinical BRD.
With exchange of weanlings and transportation, the risk to develop BRD could be close to 85%.
8
The most efficient situation is the one when no transferts exists and when weanlings are fattened in
the cow-calf producing farm. However, if not possible (limited size of the farm, limited animal feed
producing capacities, etc.), the second best option is the one that would allow minimum risk to
develop BRD at the beginning of fattening would correspond to the vaccination of the weanlings at
an early stage, the length of transfers, and the number of origin farms in a given batch reduced to
minimum (Error! Reference source not found.). But this “ideal scenario” is presently quantitatively
negligible.
Figure 4: Principal strategies of medical control of BRD linked to the vertical coordination in the young bulls’ sector
To control the high risk to develop BRD at a minimum cost, fatteners use antibiotics in a systematic
and preventive way just before the riskiest period, the fifteen first days of fattening (Figure 4).
Antibiotics thus play a particular economic position in the vertical organisation of the young bull
sector, as they almost erase the technical dependency of fatteners with the upstream of the sector.
However, on a public health point of view, antibiotic use should be reduced, especially when used in
preventive and systematic way. Regarding the economy of public goods, antibiotics are thus an
impure object: they have both private and public value (Smale et al., 2004). As farmers use
antibiotics, they do it in a private purpose: to prevent the development of BRD or to heal the
weanlings. They expect the antibiotic treatment to be efficient and to generate profit on short-term.
But at the same time, as farmers use antibiotics, they also erode future antibiotic efficiency. Indeed,
antibiotic use generates antibiotic resistance on the treated animal, on the farm or on a larger scale.
Thus antibiotic resistance and antibiotic use have a public value, the insurance for future generation
to have a useful and protective tool to manage animal and human health (Smale et al., 2004).
Regarding the issue of antibiotic use, fatteners thus face a social dilemma. Their personal interest is
opposed to the collective interest (Games et al., 2016).
Regarding all existing transactions in the young bulls’ sector, from perfect vertical integration (cowcalf and fattening systems) to perfect spot markets, transaction costs economy is very interesting to
use to explain observed commercialisation patterns and to understand how sanitary issues are
included in estimated transaction costs by stakeholders.
9
3.3.
Methodology and data
Due to the very high complexity of the young bulls sector and the lack of precise description of its
functioning, we first had an exploratory and qualitative phase. We did qualitative semi-structured
interviews (Error! Reference source not found.). They were located in Western and Central France,
due to the importance of the studied sector in those regions.
Table 1: Semi-structured interviews and field observations
Profession
Number interviews / field observations Depending institution
Semi-structured interviews
Cow-calf producer*
1
Cooperative and independent
Cow-calf and fattener*
3
Cooperative and independent
Fattener*
4
Cooperative and independent
Middle men*
6
Cooperative
Farm advisors*
4
Cooperative
Veterinarians*
6
Cooperative and liberal
Middle men superiors*
3
POC and PONC
Chamber of Agriculture*
1
Meat producers’ Union*
1
Slaughterhouse director*
1
Senior Official**
2
French Ministry of Agriculture
Field observations
Specialized fattening units* 4 (one day)
Livestock Market***
2 (one day each)
Sorting centre*
2 (2 hours each)
Cooperative
Regions: *Western France; ** National; ***Western France and Central France
The semi-structured interview approach aims at describing a wide range of possible circumstances
regarding a certain field, rather than evaluating a question on a quantitative and representative way
(Kvale, 1996; Lagarde, 2006; Sivertsson and Tell, 2015). This qualitative method allows us to take into
account a wide range of topics. The length of exchanges (approximately two hours) was in favour of
more authentic discussion, even if an ex-post re-organisation of personal histories is always possible
(Brinkmann and S. Kvale, 2015). Interviews were structured according to main thematic questions: (i)
general presentation of personal career and professional structure, (ii) everyday interaction with
other stakeholders of the value chain, (iii) practices regarding sanitary management and antibiotic
use, (iv) understanding current changes, fears and motivation linked to future prospects.
4. Results and discussion
In the young bulls sector, the governance system is translated into main patterns. From the most
integrated to the less integrated system: (i) total integration with cow-calf and fattening systems, (ii)
written contractual agreement, renewable on yearly basis, (iii) oral commitments, (iv) spot market.
Table 2: Recap for TCE hypothesis in young bulls sector
Cow-calf producer
Geographic
specificity
Evaluation
criteria*
Middle men
Geographic location, Geographic
tolerable length for location
weanlings
Fattener
Geographic location,
tolerable length for
weanlings
10
Physical
specific
assets
Dedicated
assets
Human
specific
assets
Risk
Hypothesis**
Evaluation
criteria*
Hypothesis**
Evaluation
criteria*
Hypothesis**
Evaluation
criteria*
Hypothesis**
Evaluation
criteria*
Hypothesis**
Complexity - Evaluation
Uncertainty
criteria*
Hypothesis**
Frequency of Evaluation
transactions
criteria*
Hypothesis**
Temporal
Evaluation
specificity
criteria*
transportation
+
Buildings,
farm
equipment
+/++
Herd
(genetic),
vaccination
of
weanlings
+++
Level of education,
training, years of
experience
+
Truck,
centre
+
-
transportation
+
sorting Buildings,
equipment
+/++/+++
-
Level of education,
training, years of
experience, social
background
+
+++
Herd
(dedicated Market
asset), perception of fluctuations
market fluctuations,
level of public aids
farm
Level of education,
training, years of
experience
+
Investments
in
buildings, perception
of
market
fluctuations, level of
public aids
++/+++
Number of possible
marketing channels
+/++
+
Number of possible marketing channels
Frequency
of Frequency
of Frequency
of
transactions
transactions
transactions
++
++
++
Tolerable lengths to Duration between Tolerable lengths to
sell weanlings
purchase and sale buy weanlings
of weanlings
Hypothesis** +
++
++/+++
Information
Evaluation
Market
fluctuation Market fluctuation Market
fluctuation
availability
criteria*
information
information,
information, sanitary
sanitary
passed passed events
events
Hypothesis** +
+/++
+++
*According to TCE theory, observations on field and semi-structured interviews
** Hypothesis regarding the influence of the considered factor on a higher coordinated pattern: +
towards a less integrated pattern; ++ towards a neutral influence on pattern; +++ Towards a higher
integrated pattern
4.1.
Negligible impact of geographic specificity and physical assets on
TCE, but structural elements of the sector
In the young bulls sector, as in agricultural sector, we can consider that human assets and geographic
specificity are negligible (Ortmann and King, 2007). The non-geographic specificity is reinforced in
young bulls sector because animals can be transported over long distance, on the contrary to other
live products, such as poultry (Vukina and Leegomonchai, 2006).
However, geography is important to determine the nature of agricultural production, for instance,
young bulls fattening activity in the West, cow-calf producing activity in the Centre of France. If the
geography influences the production choices, farmers always have possibilities to sell animals
through different commercial paths and the lengths of transports and logistic issues do not seems to
11
be very determining. Those two elements thus won’t be further developed in the following
paragraphs.
One important hypothesis underlying the following analysis is that cow-calf producers and fatteners
did develop different farming systems, in different geographic area, under different constraints,
under different economic environment,… resulting in different economic behaviours (Table 2).
4.2.
Cow-calf producers and fatteners facing different market risk
Cow-calf producers and fatteners share very different risks linked to market fluctuation, which are
important both for weanlings or young bulls.
Market fluctuations heighten the risk in young bulls sector as there is high level of specificity of
physical assets. However, physical assets are heterogeneous.
Schematically, cow-calf producers have simple buildings, and the animal feed is mostly based on
pasture. The system is little demanding in investments. However, the farmer’s herd represents a very
high level of dedicated assets. This element is rather considered by farmers to be a burden in case of
transmission of farm businesses, than being a source of risk in case of unfavourable market
fluctuations. Furthermore, cow-calf producers have almost one third of their resource provided
through common agricultural policy (CAP) subsidies. The cow-calf producing system thus mitigates
risks linked to market fluctuation. This situation is rather in favour of spot market and no strong
vertical coordination.
On the contrary, fatteners need large building which can be considered as specific investments. The
most important asset is the purchase of weanlings, considered as a dedicated asset. Weanlings are
expensive, especially when bought in batches. Depending on fluctuation of the markets of young
bulls, this thus generates a high risk. This is particularly true, because the price market of weanlings is
not correlated with the one of young bulls. Fatteners are thus facing important risks linked to market
fluctuations and heightened by their level of specific assets (physical and dedicated). This situation is
rather in favour of a high level of vertical coordination (contracts, relational or formal).
4.3.
High logistic complexity and uncertainty in the young bull sector
Due to the attributes of weanlings and young bulls (living animals), uncertainty is of paramount
importance. The characteristic of weanlings is insufficient to predict the future potential of the
animals and many hazards might disturb the growth of a weanling.
The complexity and uncertainty of the young bulls sector is mostly due to logistic issues. Indeed, cowcalf producers produce weanlings in an irregular way. Depending on seasons and weeks, cow-calf
producers sell either varying number of weanlings or none. For instance, a need for liquidity might
once increase their sales. Batches of weanlings always contain less than 8 animals and often less than
4.
On the contrary, fatteners need a regular supply. The process of fattening is more standardized.
Weanlings are fattened in units composed of approximately 10 animals. The fattener needs his
fattening buildings to be optimised and thus filled most of the year. At the moment, most of
fatteners’ demand requires batches composed of weanlings of the same size, which implies an
increased mixing of weanlings. This creates uncertainty regarding the characteristics and future
12
growing potential of batches, which cannot be predicted according to any available characteristic of
batches.
Regarding the described process, the matching of the offer with the demand is complex and need
adaptations on daily basis. This work is done by numerous middle men and very few weanlings are
sold through contractual agreements (Timsit et al., 2011). This logistical complexity is doubled with
the complexity of marketing channels. Indeed, farmers might sell and buy animals through middle
men, livestock markets, or directly to farmers. And those channels are not exclusive. This means that
a weanling might be sold several times through one of this possible channel. For example: middle
men, livestock market, and middle men again before fattener. This process increases the uncertainty
in transactions.
On the cow-calf producer point of view, complexity and uncertainty of weanlings’ transactions as
well as the diversity of existing marketing channels are not in favour of contractualisation and strong
vertical coordination. Indeed, there is less monetary risk in having many marketing channels to sell
their weanlings (Chen et al., 2004). In addition, the uncertainty linked to prices on market fluctuation
is not in favour of long-term relationships (Coronado et al., 2010). Stakeholders do not want to
restraint themselves with contractual agreements. Uncertainty has also often negative effects on
trust, which is a very important element to develop long-term relationships (Geyskens et al., 1998).
Complexity and uncertainty should be less influential for fatteners whose production is more
standardised.
4.4.
Different points of view to define quality in transactions
When farmers sell weanlings, there is almost no existing price premium (one exception of some
contracts), even if market prices are a little differing depending the considered breed. For instance,
the frequent sales of young bulls on spot markets in Central France, do not enables the valorisation
of the differentiation and quality of products (Hendrikse, 2002). When fatteners sell young bulls, the
same phenomenon exists. And finally, the down-stream of the young bulls sector is very poorly
differentiated. There is labelling systems (organic, Red Label, AOC and PGI)1, however, traded
volumes are negligible: 3% of commercialised French beef in 2012 (Interbev, 2013). Productions
(living weanlings or young bulls’ meat) are facing international competition and are thus depending
on market fluctuation. On those markets, suppliers do compete on volumes and price but there is no
price premium for quality (Soler, 2002).
In addition to the lack of differentiation of products in the sector, the quality of animals exchanged
(weanlings or batches) is hard to define in the young bulls sector. It depends on the point of view
adopted (cow-calf producer, middle men, fattener, veterinarian) (Error! Reference source not
found.).
Table 3: Different stakeholders’ points of view regarding the quality of young bulls
Stakeholders’
points of view
Quality attributes
Cow-calf
producer
Fattener
Slaughterhouse
Veterinarian
Diff
ere
nt
sta
ges
We
anli
ng
(W)
We
anli
ng
bat
ch
(be
gin
nin
g of
fatt
eni
ng)
(W
B)
You
ng
bull
s
(en
d of
fatt
eni
ng)
(YB
)
Zootechnical characteristics
Breed
W
Middle
men
W
W
YB
1
Protected Geographical Indication (PGI): 1 designation, Red Label: 19 designations, and « Appellation
d’origine controlée” (AOC): 4 designations. (Http://www.boeuf-selection-bouchere.com/, 2016)
13
Age
W
Weight
W
Potential daily
weight gain
Beef
conformation
Uniformity (size)
of batches
Quality of meat
(e.e.
Ω3/Ω6
ratio)
Logistical characteristic
Farm of origin
WB
YB
W
WB
W
WB
YB
WB
WB
YB
W
WB
W
WB
YB
WB
WB
YB
WB
WB
YB
WB
YB
YB
YB
W
Number of farms
of origin
Number
of
transitional
intermediaries
Duration
of
W
transportation
Sanitary and health characteristics
Official
W
vaccination
Past
sanitary
events
Sanitary
preparation
(often
antibiotics,
anthelmintic,
vaccination)
Immunization
status
Anthelmintic
treatments
Safety
antibiotics
residues)
(e.g.
W
WB
WB
WB
W
W
WB
WB
WB
W
WB
W
WB
YB
YB
Error! Reference source not found. shows that sanitary criterions are neglected by all stakeholders
but veterinarians. This could be linked to the lack of valorisation of quality and good sanitary
condition of weanlings. This situation disfavours public health concerns and embedded future
economic performance of weanlings.
14
Beyond this apparent uniformity of prices and the disparate criterion of quality, an informal system
of quality is developed on markets. Each week, livestock markets give a quotation for weanlings
depending on their breed, age, weight (2 categories). This gives a benchmark to negotiate prices
during transaction. Afterwards, an informal system allows a discussion of prices depending on the
aspect of weanlings, their age, the uniformity of batches, and other criterion cited in Error!
Reference source not found..
There is no price premium for quality at the upstream or the down of the young bulls sector. This
functioning does not prompt farmers of the sector to improve their quality and investment. In the
transactions, quality of products is a neglected factor for all stakeholders. As a consequence, spot
markets are preferred to more vertical coordination.
Most frequently, in the TCE, lifeless products are taken into consideration. However, weanlings are
living products and their health characteristics at a given moment t determine their future and good
performances at a given moment t+1. In this context, health (out of any genetic factor, breed, etc.) is
thus a major element to define quality of the weanlings. However, as we described, quality criterions
are very diverse depending on stakeholders.
4.5.
Information asymmetry
The level of information sharply decreases between cow-calf producers and the downstream of the
sector (Error! Reference source not found.). At each transaction, there is a loss of information.
The cow-calf producer has information on animal health status (official and personal records of
sanitary events and medical treatments on farm), on his age and weight. The first intermediary might
be aware of those events if he knows the cow-calf producer well enough. But rapidly after the
weanling is sold by the cow-calf producer, the only remaining information is written on two official
documents: (i) the passport which indicates the identity of the animal (identification number, farm of
origin, age), (ii) on the back of the passport, the green card, which indicates the sanitary status of the
last farm where was the animal was (but only on regulated diseases) and all the past owners of the
animal. The two documents are compulsory for every transaction. The weight of the weanling is also
roughly estimated by stakeholders or precisely measured with a balance. The ratio age/weight
comparison gives a rough idea about the good health (present and/or passed) of the weanlings.
However, the described elements (on official documents and weight) are not precise enough to
predict the following performances of the animal and to estimate risk to develop BRD according to
risk factors encountered. In addition, as explained in the previous paragraph, the quality of animals is
disparately defined in the sector, and difficult to collect. The high level of information asymmetry is
in favour of spot markets, or other poorly coordinated patterns.
4.6.
Negligible importance of temporal specificity
In the young bull sector, production cycles are particularly long. One weanling can be sold during
several months. If the farmer has the capability (space and food) to keep a weanling longer than
expected, it doesn’t compromise the future valorisation of the product. The flexibility for the fattener
could be tempered if he has an important financial pressure on the business case of the building and
thus has to use it in the most profitable and intensive way. In addition, one young bull might be sold
at different stage of fattening, as bovine slaughterhouses are used to slaughter very different types
15
of bovine in terms of size and conformation. As cow-calf producers encompass very little temporal
specificity, this is in favour of spot market or little vertical coordination.
Fatteners encompass more variable levels of temporal specificity, from negligible to neutral. This
parameter thus has little influence on their choice of a vertical coordination system.
5. Conclusion and suggestions for further research
This work allows a better comprehension of a vertical coordination system evolving under the
influence of global economic context, logistical constraints and historic background. Further research
should allow a better and quantitative estimation of transaction costs in order to propose lever for
public policies to reduce antibiotic use.
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