CHALLENGES BEYOND THE FARM GATE
By David Morris

Like it or not, the agri-food marketplace is changing. It has become more segmented, more diverse, more specialized and more discriminating. Farmers who hope to have any control over their incomes in the future need to find better ways to exploit these specialized markets. That was the essence of the message brought to the 2005 Corn, Soybean and Wheat Conference by Larry Martin, Chief Executive Officer, George Morris Centre.

Martin explained that, historically, the structure of the agri-food industry evolved to facilitate the production and use of bulk commodities for mass markets. In these markets, little attention is paid to the characteristics of products coming off the farm. With a few exceptions, corn is corn, and it doesn't matter much which hybrid you grow or how you grow it, your crop still goes into the same pipeline as everyone else's. And you get much the same low price. Martin acknowledged that markets for bulk commodities will probably increase as bio-based industries such as ethanol and bio-diesel expand. However, he offered little hope that the expansion of these markets would result in significantly improved profitability for growers. With bulk commodities, price will always be king, he said, and ultimately, the country or region that can continue to produce at the lowest price will win. Given the realities of world markets for grains and oilseeds, that is not good news for Canadian producers.

On the other hand, demand for niche products, tailored to meet specific consumer needs and preferences, is growing in most industrialized countries. To some degree, this trend is already reflected in our export statistics. Martin showed, for example, that since NAFTA came into effect, our exports of bulk grains and oilseeds to the USA have increased very little. Exports of intermediate products, such as live hogs and live cattle (before the BSE crisis) increased slightly. Shipments of consumer-ready products have increased almost 5 fold. According to Martin, this growing demand for consumer products offers the best opportunity for farmers, who are willing to make the effort, to add value to their products and enhance their incomes.

These newer markets are characterized by consumers who are well-informed, well-off, and demanding. They are also willing to pay extra in order to get exactly what they want. Price is no longer the determining factor in their purchasing decision. The food-purchasing or dining "experience" counts for more than does the cost. Such consumers are more concerned about how a product tastes, looks and smells; about how it was produced; about the effects its production has on the environment or on animal welfare; about where it came from; and about the image it conveys. In addition, a very high value is placed on consistency of quality and supply, leaving little room for substitution if the quality of the experience changes at all. Once the consumer has decided that he or she must have a certain product, made in a certain way, from a certain variety, grown in a certain way, then that's the only product that he or she is likely to buy.

The current system, although it handles bulk commodities efficiently, isn't equipped to service such niche markets. The needed information about consumer preferences and how to produce goods that meet those needs isn't getting to the grower, nor is a fair share of the consumer dollar. Martin described the current system not as a supply chain but as a set of paired links - grower-elevator; elevator-processor; processor-distributor; and so on up to retailer-consumer. At each step there is little awareness of the specific needs of those elsewhere in the system. Each level is focused primarily on its own needs and those of the next level, at most. Because of the lack of communication, and outright secretiveness, the system loses information about consumer needs, in particular. As a result, it also loses the opportunity to add value to the product.

Exploiting these new markets will require a change in approach on the part of everyone in the supply chain, including the grower. Because low cost is king, bulk markets reward growers who excel at cost control, creative use of production technology, flexibility, risk management, economy of scale and human resource management. Niche markets, on the other hand, reward market knowledge, communication, process control and consistency. To successfully satisfy a niche market, everyone along the supply chain must know and understand the features that the ultimate consumer wants; how to manage their part of the chain to produce or preserve those qualities; and how to tell the consumer what he or she is getting and why it is superior to the alternatives. This will happen only if there is sufficient incentive. Hence, the system must be structured so that everyone involved is adequately and fairly rewarded for their efforts. Prices at each level need to reflect the value added for the consumer, not the price of bulk commodities in Chicago.

Martin cited several examples of supply chains that have been very successful in meeting consumer needs and creating a growing and loyal clientele. For the most part, there is a high degree of producer control within these chains. Commonly, they are co-ordinated by large family operations or by grower cooperatives. The chains are also relatively short and highly integrated, so that information flows smoothly from consumer through to the grower and back. If the growers don't own the processing facilities outright, they have a close alliance with an operator who can meet the required specifications. Similarly, they have a very close working relationship with the retailer or restauranteur. Production also tends to be localized in a specific area or region. This both makes co-ordination and supervision of production easier and facilitates product branding. Consumers like being able to identify a product with a specific area. The smaller the area is, the easier it is for producers to be able to create and market an identity and image for that area.

There are some obstacles to the implementation of this type of supply chain, Dr. Martin acknowledged. He noted that regulatory and marketing frameworks must become more flexible, to allow for vertical integration and diversification. In addition, many farmers don't like the concept because it represents such a major change in approach. "One size doesn't fit all," he said. "These markets will not be accessible to everyone, only to those who are willing and able to meet the challenges."