The search for success in agriculture

PGP magazine/July 2003

By Larry Martin,
CEO, George Morris Centre

Many farmers are approaching a fork in the road. One path leads to competing with U.S. and Brazilian farmers to see who is the lowest-cost producer of commodities. The other leads to competing with differentiated "products" on the basis of service, quality and consistency. Both are tough,and they require different factors for success.

Commodity margins are razor-thin and likely to stay so because of stiff global competition,continuing gains in productivity and incessant subsidies that encourage overproduction. To be successful, farmers generally take advantage of high prices once in five years (for example,1996-97) and ride out lower prices the other four years.

Meanwhile, technology and changes in the food marketplace are launching new products. The product agriculture concept is tantalizing because new products hold the specter of wider and more stable profit margins for growers. They may come from new products in new markets with few competitors,or from producing something unique for premiums that offer higher and more stable margins.

Moving up the chain

The product spectrum ranges from new uses for commodities to high-value products that exploit narrow niche markets. Ethanol and biodiesel offer potential new outlets for corn and soybeans. Similarly, bioplastics and similar products made from commodities offer opportunities where the
value of environmentally friendly products is growing. These may let producers move up the chain and own a share of the production facility through arrangements such as new generation coops. But these products are closer to commodities than new products.

Specialized product niches are waiting in many markets, and they may provide more upside to farmers. These include products such as pharmaceutical crops, organic food products and farm-to-retailer foods. Some farmers have tapped the organic market and are supplying organic foods for the health-conscious consumer, a rapidly growing segment of the population.

While a relatively new concept in this country, farm-to-retailer foods are more commonplace in some other countries. The notion is that a farmer or a group of farmers provide a "branded " product to a retailer at a premium. The branded product may result from the quality, consistency and/or service associated with the product.

An example is the grower who supplies fresh organic greens to an upscale restaurant on the Niagara Peninsula known for promoting Niagara products. Similarly, grape growers integrate into wine production to capture additional margin with a branded product.

Keys to success
Product agriculture has different keys to success than growing commodities. Partnering is often critical. Product-oriented farmers often form alliances with other farmers, processors, food companies and/or retailers to access resources needed for more sophisticated markets. Achieving critical mass is essential to most new-product ventures.

Another key is to understand final-product markets. Product agriculture is about growing what will sell, not selling what you grow. This requires a focus on quality, consistency and service to win and keep customers. Managing technology is another key. Getting first-mover advantage with appropriate production technology is important. But the value of scanning and monitoring leaps in technology, such as identity preservation, offers new opportunities. The Internet and e-commerce also may be key for marketing business models.

Learning new definitions
Redefining quality and safety standards will be essential. Certified grower programs are available in some regions to train farmers to meet these standards. More programs are likely to follow soon.
Product agriculture may offer a tantalizing array of new opportunities as foreign competitors become more efficient at growing commodities, driving down margins for Canadian farmers. To make the transition, farmers will need not just a new business, but also a new way of doing business. This new business model will focus on partnerships, marketing acumen and technology rather than maximizing production.

Editor's note: The author would like to cite Mark Drabenstott, vice president and director, and Nancy Novack, associate economist, of the Center for the Study of Rural America as sources of information for this article.