The Brazilian fed cattle activity has been facing changes over the last decades, such as technological innovations in the production system and the qualification process for the industry.
Organization and improvement in the farm management had already been observed in a recent past. Slaughterhouses and producers face some challenges, pressed by international demanding markets, especially the European. However, the organization process in the whole system has been favoring to improve both production and trades. Consequently, it helps in the search for efficiency and profitability in the chain, with competitive and adequate prices for producers, the industry and consumers.
Some aspects favored a quick change in the organizational fed cattle environment from the mid-90’s to the beginning of the 21st century, such as the creation of the CEPEA/B3 Index for fed cattle.
The need to define a value for the financial settlement of each fed cattle contract traded at the current B3 (former Commodities & Futures Exchange) has led the institution to set a partnership with Cepea-Esalq/USP in October 1993. A Price Index with credibility needed to be created, and its elaboration process involved Cepea researchers, market players from different areas and technicians of the Stock Exchange
Therefore, in March 1994, the market has started to count on the Fed Cattle Price Index that has been released uninterruptedly since then. In a continental country like Brazil, the largest meat exporter, with the biggest commercial herd in the world, it is extremely important to have a price index, since it becomes a market governance reference, reducing both uncertainties and information costs for players in the market.
Based on the Economic Theory, in order to understand a coordination system, in the case of a price index with financial settlement, it is necessary to know the relations among players, from production to final trades.
The use of a price index is justified by the intense relation between agents and the necessary coordination of their productive activities in scenarios of high uncertainty and possibilities of opportunism.
In order to understand the behavior of players involved in these transactions, the basic factors related to Transaction Cost Economics in an uncertain environment are: a) bounded rationality, in which players act rationally, but in a limited way – thus, the form of obtaining information and processing it are limited, leading the relations among agents to be incomplete; b) opportunism, in which each party extracts their respective quasi-rents from the other. Moreover, there are uncertainties in trades.
This aspect may present problems due to unexpected discrepancies of transactions and the necessary dimensions for controlling structures. If they are excessively big, their costs are higher. Therefore, the behavioral uncertainty, as a result of the opportunist use, influences organizational forms to mitigate disparities and reduce transaction costs.
Uncertainties when trading fed cattle are important to indicate the behavior of both producer and the industry. The major uncertainty point in this relation is the price received by producers. As a result, the use of a price index is essential to reduce this uncertainty.
Over the last 30 years, a direct and significant relation between the CEPEA/B3 Index for fed cattle (São Paulo state) and other 28 regions in 11 Brazilian states has been observed through several analyses.
They show that the Index transmission to other regions has an intensity very close to 1. The more organized are the areas and its regional position, the higher is the price transmission intensity.
This context indicates that the fed cattle market in Brazil has absorbed the idea of a financial index as a price reference, reducing uncertainties and information costs for players in different areas in their decision-making.