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"For producers to drive value up the
market chain, they need to shift away from focusing solely on their
new product," said Peter Goldsmith, an assistant professor of
agribusiness management in the Department of Agricultural and
Consumer Economics. "Producers need to pay more attention to
technologies, delivery systems and organizational models that, when
bundled with new products, make their customers more competitive in
their market."
Goldsmith and Karen Bender, senior
researcher in the department, conducted the survey with support from
the Illinois Soybean Program Operating Board, the Illinois Council
for Food and Agricultural Research, and the Illinois-Missouri
Biotechnology Alliance. The study focused on interviews with senior
executives of firms purchasing raw commodities.
A number of concerns, including food
safety, genetic engineering and animal welfare, have combined to
create a need for enhanced information within the food supply chain.
End-users, for reasons ranging from specialty crop quality to
genetic content, are increasingly interested in the source of the
product and how it was grown. But producers are sometimes frustrated
with the amount of price premium available for identity
preservation.
"Identity preservation -- in other
words tracking the commodity from the field to the store shelf -- is
an emerging issue, especially for grains and oilseeds," said
Goldsmith. "It may have a long-term influence on the structure of
agriculture.
"Opportunities appear to loom large to
help remove risk and improve quality in the grain supply chain
through preservation of product identity, yet the costs are high and
buyer willingness to pay is low."
Goldsmith and Bender note that
producers are frustrated that they are not getting sufficient levels
of value from demand for identity preservation. The report examines
why buyer willingness to pay is so low and possible ways producers
can enhance the value they receive in return for identity
preservation.
Today, there are two primary
distribution systems for corn and soybeans. One system has focused
on commodity crops and broadly defines quality. This distribution
continues to service the supply of the majority of the corn and
soybean crop production. A small percentage of the distribution
focuses on very high-value traits by minimizing the number of
handlings so as to reduce quality deterioration and minimize the
potential for commingling with nondifferentiated corn and soybeans.
"A problem resulting from the reliance
on two primary distribution systems is that neither channel can
efficiently supply many of the new value-enhanced crops," said
Goldsmith. "Many of these new crops are produced in larger volumes
relative to the very high-value trait crops.
"A need has developed for market
channels that will allow distribution of a product that is
identity-preserved but is less rigorous than the one used for very
high-valued crops."
Goldsmith and Bender identify four
basic transaction types and their vertical information profile.
1. Going
forward
"First, there is an incentive for
sellers to want to maintain their identity as their products go
forward as differentiated or even branded: identity preservation.
This would afford them a premium in the market," said Goldsmith.
The premium corresponds to the degree
of market uplift generated for the buyer. A good example is "Intel
Inside™" providing critical market uplift to IBM. IBM can get a
premium price for its laptop computers by signaling to consumers
that its supplier is Intel. The critical question for farmers is: Is
my product critical and unique? That will determine the level of the
premium.
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2. Going
back
"Second, transactions may yield a
premium if the buyer needs information from upstream suppliers to
mitigate risk, such as in the StarLink case. In this case, the
customer values information going backward to the supplier:
traceability. Following StarLink, because food-grade corn is
especially at risk due to pollen drift problems, buyers need
assurances and process verification that minimizes the risk of
contamination from foreign pollen," Goldsmith said.
With traceability, the level of the
premium is determined by the risk exposure of the buyer and the
unique ability of the supplier to mitigate that risk.
3.
Segregation
A third case involves lesser amounts of
information, where the product is maintained separately but the
identity preservation of the supplier is unnecessary: segregation.
Among the firms contacted in the study, Goldsmith and Bender found
that one common practice involves giving producers production
protocols to follow but then commingling grain from many producers
after purchase. Corresponding premiums are low because of lower
information requirements and reduced uniqueness.
4.
Commodity
Fourth, when the need for a vertical
information flow between producer and buyer is minimal -- as is the
case in traditional corn and soybean production -- both the products
are commingled or blended, and anonymity of the supplier prevails.
In such cases, the buyer values transaction simplicity, flexibility,
speed and low cost. Differentiated quality and knowing the identity
of the supplier are not important, so the premium is zero.
"The most significant finding from our
research was how different were the perspectives between the buy and
sell sides," said Goldsmith. "While producers are selling a product,
say white corn, the buyer's proposition is much more fragmented.
Firms buy numerous inputs, and raw agricultural products are simply
one of those inputs, and each input in turn is valued by a unique
and broad set of end-user-defined attributes that can differ
substantially from the grades and standards system.
"To understand identity preservation
business opportunities requires an understanding of the buy-side
proposition -- how and why the buyer buys. While more vertical
information in the agri-food supply chain is seemingly better, it is
not always the case. Organic and pharmaceutical crops are examples
where more information yields significant premiums, yet these are
exceptions rather than the rule. It would be valuable for
farmer-suppliers to understand why and when buyers are willing to
pay premiums."
Copies of
the report can be obtained by contacting Goldsmith at 433 Mumford
Hall, 1301 West Gregory Drive, Urbana, IL 61801.
[University
of Illinois news release]
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