Can the Farmer Capitalize on Preferred Value Chains?

A few weeks ago McDonald’s restaurants in the United Kingdom announced they would begin sourcing all pork from livestock suppliers who met animal-welfare standards established by the Royal Society for the Prevention of Cruelty to Animals. It was a move designed to appease customers who want two things: local food that is produced in an ethical, responsible way. Now all pork at UK's McDonald's restaurants will come from the farmer who agrees to grow livestock based on "Freedom Food" policies. You can take a look at the 80-page handbook here.  Wal-Mart, the world's largest food store, is moving in much the same direction.

History lesson

Those of you who study history know that supply chins of the past were more adversarial than opportunistic. In this country from the late 1800s to the 1940s, the federal government often stepped in to help farmers with antitrust action against railroads and banks that were using monopoly behavior.

The Ag cooperative movement in the teens, 20s and 30’s helped farmers level the playing field vs. big corporations. The union labor movement also helped level the power base during that period, but did not involve farmers to a large extent. It was also a period when the socialist movement in the U.S. was at its height, notes Purdue economist Chris Hurt.

"This was a time when the battle was between the farmer, their input supplier and the buyer of their products," he says. "It was viewed as a zero sum game. If the farmer got another penny for the grain, then the grain buyer lost that penny. This established an adversarial view between farmers and their input suppliers and the buyers of their farm products."

Now, says Hurt, agriculture is moving away from the adversarial view of the farmer battling participants above and below them.

"Today there is growing emphasis on supply chain cooperation and coordination," he says. "The emerging concept is that the entire chain can add value by improved technology, innovation, production, efficiency and coordination. Thus, everyone in the supply chain can be better off."

For farmers, the trick is to find ways to be involved as preferred suppliers in one or more of these value chains. That will often come at high cost if you need to put up new buildings, as many livestock farmers do when faced with changing housing requirements.

California's chicken producers had to make the choice to invest in new housing to accommodate that state's cage-free laws going into effect over the next few years. In England, the farmer will decide if the premium for growing McDonald's pork is worth the trouble to revamp buildings and management. A third of Britain's pig farmers already meet the standards.

More participants in the supply chain are seeking ways producers can add value to finished products through a host of specific attributes, management practices, or ways they produce --such as what drugs or feed ingredients go into crops or animals.

"This is a win-win philosophy, not win-or-lose," says Hurt.

Special attributes

The more commodity-driven the product, the more we tend to see the adversarial approach, like corn to export to Japan. Ten years ago when the world was awash in grain, Japanese buyers would use all kinds of excuses - usually the amount of damaged grain in a shipment - to buy corn on the cheap. But with genetic modification there may be more specific attribute commodity products, such as chicken corn, hog corn, or ethanol corn in the future. Hogs are now primarily produced in tight arrangements with packers. Milk production and marketing is now much more closely coordinated (often between multi thousand cow dairies and milk processors.

McDonald’s potatoes for French fries are not purchased on the commodity market; they are grown by preferred suppliers under some guidelines established between the growers and McDonalds.

Moving away from simple, lowest-cost commodity production is a decision only you can make. Many farmers have already touched these waters through contract production for livestock, as well as grain such as edible beans or non-GMO corn.

The more nimble your business, the better your chances of success.