Once considered a luxury food item, chicken is today a major source of animal protein in the diets of the Brazilian population. Indeed, per-capita consumption of chicken meat in Brazil grew at an average rate of 4.8 percent a year between 1990 and 2015 – a jump from 14.2kg to 43.3kg per person, according to the Brazilian Association of Animal Protein (ABPA). The country is the fourth largest consumer of chicken meat in the world.

Despite this high level of domestic consumption, about one third of the national production is exported to some 150 countries, in all continents, with export revenues reaching US$7.2 billion dollars in 2015. Between 1990 and 2015, exports have risen at an impressive average rate of 11.7 percent per year, as illustrated in Figure 1. Today Brazil ranks first in global exports, with a market share of about 40 percent. This means that for each 11 kg of chicken meat traded internationally, about 4 kg are originated in the country.

Established in 1970, Pif Paf Alimentos is one of Brazil’s ten largest food processing companies operating in the chicken and hog sectors. With five industrial units, most of which located in the State of Minas Gerais (MG), the company employs about 8000 people. It produces a diversified line of more than 300 products for both the domestic and export markets, including frozen chicken (entire and in parts), sausages, chicken nuggets and a variety of ready-to-eat meals.

Pif Paf’s processes chicken in two facilities, respectively in the municipalities of Visconde do Rio Branco (VRB), in South-eastern MG, where it sources from 324 small and mid-sized farmers, and Patrocínio, in Central Western MG, where it works with 46 large farmers. In both cases, the company works with farmers under closely coordinated contracts. In 2016 the company was slaughtering 152 000 birds per day in VRB and 125 000 birds per day in Patrocínio.

Originally the company worked in the VRB region primarily with small farmers housing 6 000 to 12000 birds per growing cycle. More recently, farmers are being required to upgrade their facilities to a minimum size of 30450 birds per cycle. As a consequence, the number of farmers in the VRB supply chain was reduced by about 40 percent over the last five years, reflecting the overall concentration trend observed in the Brazilian chicken sector.

Although the CF model followed by Pif Paf has been evolving over the years, its original concern of incentivizing production performance remains as the cornerstone. Through the contracts, farmers have incentives to continuously improve their technical efficiency and are closely monitored in that respect.

How the contracts work:

PifPaf provides farmers with one-day chicks, veterinary inputs and feed, the latter responding for about 65 percent of the production costs. It offers as well technical assistance by a team of field technicians who visit production facilities at least once every week during the growing cycle. Farmers, in turn, invest in the production facilities and respond for production costs in items such as labour and energy.

PifPaf guarantees the purchase of all chicken grown under the contracts, under a pre-agreed price determination system. The price received by farmers is established at the end of the cycle through a scoring system, which takes into account the following variables:

• The death rate, established as the percentage of live birds delivered in relation to the total number of chicks supplied at the beginning of the cycle.
• The feed conversion ratio, calculated by the tonnage of feed supplied divided by the total weight of birds delivered at the end of the cycle.
• The daily weight gain, which is the average gain of weight during the period of the growing cycle.
• The quality of management, established by the field technicians by their assessment of how well farmers observe their guidance on production and facility management.

The remuneration received by farmers by kg of chicken delivered is determined by the total score assigned to their production in each cycle multiplied by a base price per kg, which is negotiated in a yearly basis.

Clearly, under such a system farmers are incentivized to minimize the death rate, maximize the feed conversion rate and follow the technical advice that will result in an optimized daily weight gain, all of which leading to an overall high efficiency performance.

The base price mentioned above is established through a negotiation between the company and the farmer’s association. An interesting feature of this process is the fact that the base price is totally independent of the market value of chickens. It is based solely on both the company’s and the farmers’ costs of production. In this way, farmers are assured to recover their costs and have an acceptable profit margin, being shielded from price volatilities in the chicken market. Moreover, although established for an entire year the base price may be adjusted if cost items vary abnormally. A negotiation channel is always open for renegotiation, in cases of extreme changes of circumstances.

Main benefits for farmers

A strong indication of the interest of farmers in being part of Pif Paf’s chicken supply chain is the “waiting list” of some hundred potential entrants, as informed by company managers. In fact, farmers are attracted to this system by a number of reasons, including:

• Access to pre-financed inputs, thus reducing working capital and the associated financing needs.
• Access to technical assistance, allowing individualized guidance on nutrition, animal health, facility management, etc.
• Assurance of a guaranteed market.
• On-farm use of chicken manure, which farmers apply in their crops.
• Increased credit worthiness, including the ability to use the contracts as collateral to guarantee bank loans for on-farm investments.
• Insurance for “force majeure” events, which is provided by the company.

The chicken CF operations of Pif Paf have been active in the VRB region for more than 40 years. By itself, this long-lasting duration is a strong indication of the success of the company’s supply chain governance model, which can be attributed, inter alia, to the following critical factors:

• The firm negotiates prices and discusses the score assignment tables with the producer’s association
• The firm is rigid with regard to non-performance. Non-performing farmers are eventually replaced, especially in cases where opportunistic behaviour is identified. If inputs such as feed are diverted, for instance, farmers are initially suspended. If the problem persists, they are terminated and their facilities will never be contracted again by Pif Paf, even if sold to others.
• The firm provides incentives for improved technical efficiency, via the payment system. The better one performs, the higher their compensation.
• Trust has been built over the years. Farmers can rely on the company and vice versa.