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 BUILDING LONG-TERM RELSTIONSHIPS WITH SPECIALTY CROP PRODUCERS by Corinne Alexander, Purdue University November/December 2004 One of the major challenges for specialty grain buyers is developing long-term relationships with producers in which both parties understand each other's needs. Production contracts are not new. They have been used since the 1920s, and contracting is now the norm for many specialty crops. For instance, a 2002 corn and soybeans survey by Ag Education & Consulting LLC found that in Illinois 87 percent of white corn, 83 percent of high oil corn, and 82 percent of high starch corn are produced under contract. Under these contracts, the producer makes most of the production decisions. The one exception is that the buyer often requires that the producer plant hybrids or varieties from an approved list. Almost all specialty crop contracts are written on a yearly basis, and therein is the challenge of transforming a yearly contract into a long-term relationship.
Overwhelmingly, producers enter contracts to generate additional revenue. In a survey conducted by Purdue University of Indiana specialty crop producers, 92 percent contract for additional revenue (table 1). Other reasons included market access (37 percent), access to seed (28 percent) and to reduce price risk (21 percent).
Many producers have experience producing specialty crops under contract. For some, the contract experience has been positive and they received the additional revenue they expected when they entered the contract. For others, the contract experience has been negative in that the expected additional revenue did not materialize. In 1999, focus groups were conducted with producers who had previously contracted to deliver high oil corn and viewed their experience as negative for two reasons. First, several of the producers had purchased seed that did not contain an adequate number of pollinators and, consequently, the oil content of the corn was not enhanced and the corn did not receive a premium. Second, over a three-year period the premiums for oil content had declined, and the producers had no reason to expect that premiums would improve. These mixed experiences are reflected in the LCP survey, which found that producers believe contracting will continue to become more common in the future but that they are less enthusiastic about contracting for their own operations. More than 60 percent of corn/soybean producers and wheat/barley producers (but only 22 percent of cotton producers) agree that, "In the future, more agricultural products will be produced to specification under contracts with buyers." That said, they appear to be taking a wait-and-see approach because they are less positive about the likelihood of increasing contracting for their own operations. Figure 2 shows that only 34 percent of corn/soybean producers and 47 percent of wheat/barley producers anticipate producing more products under contract in the next five years.
The second foundation for a long-term relationship is communication. An anecdote that clearly illustrates the importance of both value and communication comes from buyers of non-GM soybeans. In contrast to the previous example where high oil corn producers experienced premiums that steadily declined, the premiums in the non-GM soybean market have been increasing from around $.05 to $.10 per bushel in 2000 to around $.35 to $.50 per bushel today. The quality standards for non-GM soybeans are extremely stringent at 99.5 percent purity and, as a result, a non-trivial portion of the non-GM soybeans produced fails to meet the requirements. The buyers are upfront about the difficulty of producing non-GM soybeans and tell the producer the current failure rate. When the market was first developing, the failure rate was above 30 percent of the loads delivered. Today, as the producers have improved their methods for identity preservation, the failure rate is on the order of 12 to 17 percent. The information on failure rates allows the producer to compare his performance relative to other producers, and more importantly, allows the producer to form an accurate expectation of the additional revenue (a $.35 premium with a 17 percent failure rate translates into a $.29 premium). Specialty grain buyers face significant challenges in maintaining long-term relationships with producers. Grain buyers who are successful at having producers contract with them every year attribute this to offering the producer a valuable relationship and clearly communicating the risks and challenges. If producers have good information, they can form accurate expectations and are much less likely to be disappointed with the relationship. AM Dr. Corinne Alexander is assistant professor in the Department of Agricultural Economics at Purdue University. Tweet |
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