SHAKE-UP CREATES VALUE IN FOOD PRODUCTION
Market segmentation in agrimarketing today means segmenting the market according to farmer/producers. But the old rules of ag market segmentation are being crushed in the process of agriculture creating differentiated products. Segmenting by farmer customers may soon change to segmenting by end-consumers.
Identity preservation, traceability, value enhanced systems are some of the new segmentation rules that are radically changing ag markets. Information, data systems, product customization and a unique focus on the consumer drive this segmentation shake-up.
The ability to segment the market depends on the data that comes from both the consumption side and the production side, according to Nick Kalaitzandonakes, associate professor of agribusiness and director of Economics and Management of Agrobiotechnology Center (EMAC), located at the University of Missouri-Columbia.
QUANTIFYING, CAPTURING AND MAINTAINING VALUE
"Value in segmented markets comes from the demand," he says. "The willingness for the consumer to pay for anything other than the average drives the system." In short production chains can only capture as much value as the consumer at the end of the chain is willing to pay.
He also says the value is in the information. "To capture any of this value, you must be able to listen to refined consumer demands, deliver the goods and deliver the information that guarantees the goods are consistent with consumer desires. No information flows, no value."
Thus, value is up for the taking by developing segments and maintaining information throughout the system. The question is who will take it first, and how. This segmentation shake-up is still in the early stages, with only a handful of farmers vying for this value. And as these farmers do so, they are creating their own roles in a newly segmented system.
Kalaitzandonakes is currently working on two case studies. Each highlights a different way once fragmented farmers are now organizing to capture this new value. One is a farmer group taking advantage of aggregated production. The other is a farmer association that works in setting farmers up with end-user markets (market discovery).
AG GUILD OF ILLINOIS
Kalaitzandonakes is studying the Ag Guild of Illinois, a for-profit limited liability corporation currently comprised of 34 producers. Each participant pays $500 per share of stock and 20 percent (or 200 acres) of production to the Guild's management. There is a waiting list of producers wanting to join the Guild next year.
"We're aggregating producers together to act as a large mega farm, but still owned by individual producers," says Frank Beurskens, consultant to the Ag Guild of Illinois.
By aggregating production, the group accomplishes two goals. "It lowers cost of production through economies of scale - meaning you get bigger," he says. That's important for producers who still have one foot in the commodity world. But the aggregation also helps in the dawning differentiated market by adding negotiating value.
"Instead of negotiating with 35 farmers, the processor or end-user negotiates with one group," Beurskens says. In other words, information transfer is simplified.
"The Guild coordinates and manages the production," he says. "It reduces the cost for the end-user needing to coordinate production, and it allows better coordination and information flow to emerge."
The Guild is also creating added value in itself by focusing on creation of proprietary knowledge leading to continuous improvement of the production process and improved quality. "The Guild is working with researchers to learn more about what producers can do to influence value on the farm," Beurskens says. "Examples include information management through GIS systems and database applications, conducting in-field research to identify relationships between soil, slope and seed composition and identification of varieties best suited for specific end use applications."
MISSOURI SOYBEAN ASSOCIATION
Another group Kalaitzandanakes is studying is the Missouri Soybean Association (MSA). This group is creating a database of producer capabilities, identifying customers with specific needs and putting growers and end users in contact. "Our role is as a facilitator to help producers make more money," says Dale Ludwig, executive director of the Missouri Soybean Association.
The association reduces risk for farmer organizations that want to produce for specific customers. "By reducing the risk involved in finding markets, the investment becomes the farmers willingness to put some dollars in to developing their system to ensure quality as well as promoting within markets in some cases," he says.
These aggregated farmer organizations are attractive for many reasons, he says. They give farmers the critical mass of production to supply larger markets. They also allow individual farmers to slowly get into growing value-added crops. Plus, the costs arenít extremely high for creating these organizations. Of course there are legal costs, but they are limited, he says.
"It is one of the lowest cost ways you can get into any value-added business," he says. "And because you can do it gradually, it limits your exposure to how much you could potentially lose."
Ludwig's association starts by identifying the potential customer and the genetics. "We either figure out if the genetics work for a particular end user, or we first determine what the end-user wants and then go find those genetics," he says.
TRENDS FORCING SEGMENTATION
Starting with the end-user or genetics - either way, the point is that this is the direction Kalaitzandonakes is convinced is the direction of the ag industry. "All the major trends are forcing the system that way," he says. Those trends include consumer demand for food information, information technology, biotechnology and globalization.
One of the major trends is consumer interest in their food production. "As consumers become more urbanized, they understand less about food production," Kalaitzandonakes says. "As consumers understand less about production, they become more interested in how their food is produced.
"Increasingly, consumers want to know more about the safety, the health properties and even the 'ethics' or the environmental impacts of their foods. Knowing more about how their food is produced gives consumers a sense of control," he explains.
Increased consumer demand for production information isn't the only trend driving agriculture to this segmented era. The fact that ag can deliver such information highlights the information technology trend.
"Because of information technologies used at each part of the ag value chain, there is increased availability of information codified in electronic bytes that are easy and inexpensive to transfer," explains Kalaitzandonakes. "Production practices become maps or entries in databases, much like sales data or consumer demographics. As bits and pieces of information get connected, coordinated and transferred up and down the supply chain they become the essence of value added."
Two other trends are globalization and biotechnology. "Globalization and liberalization of markets unlocks potential markets and increases potential identification of segments," he says.
"Biotech promises to customize products for end users and add market segments," he says. In short, it's the technology that will allow agriculture to cater to segments' needs and wants.
CHALLENGING THE SYSTEM
Despite the trends that may clearly point to a segmented future in agriculture, there are still challenges to overcome in creating these segmented systems.
Ludwig says the biggest problem is finding the market and developing the market. "It's a balancing act of putting together markets and growers at an equal pace. It's hard to go out and find the market without having the growers put together," he says. "But if you go out and talk to the growers too early, they get frustrated because they don't have a market in a reasonable amount of time. Finding the growers is easier than finding the markets."
"When discussing a contracting opportunity, the very first question from producers is how much will you pay me to do something," Beurskens says. "But this is entrepreneurship. Investments must be made with pay-offs expected in the future. Producers must move beyond expecting somebody to pay them to change their behavior."
Producers are also known for their independent way of thinking, which Beurskens notes as another challenge. "The independent nature of production may very well be its demise," he says. "There's more value in having production organized, working toward a common end goal than having a bunch of individual producers trying to figure out how to make the most money for themselves without any regard to the value of their product for consumers in a grocery store."
IMPACT ON MARKETING INPUTS
Although the Ag Guild of Illinois was developed with the output in mind, Beurskens acknowledges the fact that aggregating input purchases is an obvious extension of the group.
"We're still in a commodity market, which means the focus is on lowering costs," he says. "One way to lower costs is to aggregate purchases. Seed, fertilizer and chemicals in an aggregated world are all low cost commodities and prices will keep going down."
Ludwig sees this aggregation as a benefit to input marketers. "It provides input marketers easier access to the growers," he says.
Another effect on ag input marketers is the fact that the production process, and the information contained in it, is being sold to end-users. In short, end users are making the input decisions by buying the process.
"Seed genetics and crop inputs such as fertilization or post emergence spraying are prescribed in many contracts," Beurskins says. "Row crop production in the near future will likely be 'branded' production." AM