June 20, 2003

URBANA—Agricultural producers seeking to market crops whose value hinges on identity preservation need to understand the needs of those who are buying them, according to a recent University of Illinois study.

“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 (C-FAR), 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, producers are frustrated that they are not getting sufficient levels of value from identity preservation demand. The report examines the reasons for 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 comingling with non-differentiated 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.

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 TM” 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.

Going Back

“Second, transactions may yield a premium if the buyer needs information from upstream suppliers to mitigate risk, such as in the StarLink TM case. In this case, the customer values information going backwards to the supplier: traceability. Following StarLink TM 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.

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.

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.

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