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The new business model in agriculture will change the way farmers make decisions, says Dr. Michael Boehlje, a professor in the Centre for Food and Agricultural Business at Purdue University in Indiana.
“We have seen profound changes in many dimensions,” Dr. Boehlje says. “Agribusinesses need to develop strategies on how to deal with those changes.”
For the last 30 years, Dr. Boehlje has examined the transformation occurring in the agricultural industry. He shared his research findings in February, during AgChoices 2006, at Westerner Park in Red Deer. “Ag-business needs to take advantage of future opportunities,” he says.
Dr. Boehlje’s research interests include: alternative systems of coordination of the food and industrial product chain; the industrialization of agriculture; and alternative financial and organizational structures for farm and agribusiness firms.
He believes that much of agriculture is moving from a commodity industry to one with differentiated products. “The produce-and-then-sell mentality of the commodity business is being replaced by the strategy of first asking consumers what attributes they want in their food products, and then creating or manufacturing those attributes in the products,” Dr. Boehlje says. “This may, in fact, require changes in how the raw material is produced and what it does not contain, as well as what it does contain.”
He says there is a movement toward a more tightly aligned market arrangement with evidence suggesting these arrangements remain extremely critical for producers.
“Development of a contract market is one example of a new business model,” says Dr. Boehlje. “Contract production has less price risk and market risk. The return on assets may be reduced, but many of our lenders are wanting their farm owners to manage their price risk, while producing their crop.”
Dr. Boehlje says that contractual arrangements like these have become increasingly popular in the last 10 years, throughout the United States. “In 1992, nearly 20 per cent of pork was produced through a contractual alliance,” he says. “Today, that number has increased to 85 per cent. Producers have realized that they’re able to grow their businesses more rapidly this way.”
In Canada, the agriculture industry continues to change at a dramatic pace. For example, technology is used throughout Canada’s food production system to increase efficiency, improve quality, conserve energy and protect soil and groundwater. Food safety and quality systems, farm and ranch management software and crop and soil monitoring systems have been used on farms for years.
Global positioning systems (GPS) that enable farmers to precisely locate field positions are widely used in agribusinesses. In combination with other information systems, GPS technology enables farm managers to track crop production and monitor yields.
Dr. Boehlje suggests that there are four possible drivers for the rapid consolidation and coordination of the agricultural industry. These include: 1) efficiency gains; 2) risk management; 3) traceability; and 4) response to consumer needs and trends.
“The idea of ‘Wal-Marting’ agriculture explains a situation where all players in the value chain - including input manufacturer, input retailer, producer, processor and food retailer - are linked, to improve efficiency and overall performance of the entire system,” he explains. “The supplier is informed when a product is needed, rather than having the retailer (Wal-Mart) keep a large amount of unnecessary inventory. The reduction of excess inventory lowers cost and improves the services available to the customer.”
He notes that improved information-sharing will be necessary for all involved to succeed, and the trust along the entire chain will need to be assessed.
“Growers need to understand their customers,” he says. “You need to know who you’re doing business with, and you need to understand what that customer values and what he requires. Discuss with your customer how you can create value for him.”
Growers and producers should keep abreast of change. “This involves broader reading,” Dr. Boehlje says. “Farmers must stay informed on the current food trends in the marketplace.”
The development of food system value chains will dramatically impact the traditional relationships that exist between salespeople and their customers, throughout the agricultural sector. “Rather than depending primarily on personal relationships to gain and keep business, the new system is increasingly based on business-to-business issues, where the relationships are based more on economics and technical value,” he says.
Another potential driver of consolidation and integration is responsiveness to consumer trends. “As businesses continue to consolidate and integrate, the need for additional services that set the retailer apart become more important,” he notes. “These services include anything that improves the customer’s efficiency and subsequently, the customer’s bottom-line.”
Creating alternative ways of doing business also provides an opportunity for a farmer to have a longer-term relationship with his buyer and producer. “We’re seeing lifetime customer valuation, where the buyer and producer maintain a relationship,” says Dr. Boehlje. “A key issue in agribusiness is, how do I develop a relationship, and how do I create value for my customer?”
To download Dr. Boehlje’s presentation from AgChoices click here.
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