The Economics of What to Produce

Larry Lev, Applied EconomicsOregon State University

These efforts were supported by Agriculture and Food Research Initiative Competitive Grant no. 2015-68006-22906 from the USDA National Institute of Food and Agriculture.

Intro: A Tale of Two Food Systems

Fringe (10 %)

MAINSTREAM (90%)

A Tale of Two Food Systems

Fringe (4%)

MAINSTREAM (96%)

II. Enterprise Selection: Characteristics of a Good Specialty Crop

• Adequate size of target market• Extended production and marketing season• Potential for value added opportunities• Complementary to farm operation• Difficult to grow (steep learning curve)• Expensive to get into (high initial investment)• Supporting infrastructure available

Other Factors to Consider• Market information, research and analysis• Trends (demographic, economic, health, etc)• Crop adaptation to a specific location/area• Pest and disease issues• Supporting infrastructure & facilities• Laws and regulations (permits/licenses

needed) • Product/Service life cycle and seasonality are

critical

Market Driven Enterprise Screening Tool

• Intended to help growers assess potential of new crop/enterprise alternatives

• Organized into three sections:– Descriptive Section– Comparison worksheet– Example comparing three alternatives

• Emphasis on market issues

1. Market Driven Enterprise Screening Tool: http://sfp.ucdavis.edu/docs/new_enterprise.pdf2. Market Research for Market Readiness (OSU/FIC)http://fic.oregonstate.edu/food-innovation-center/product-development/market-research-market-readiness-mktrd-protocol

III. Values-based food supply chains• Deliver more products to a larger region

than farm-direct and are distinguished from mainstream food supply chains by:– Products differentiated based on

superior quality, environmental stewardship and social responsibilityand

– The characteristics of the strategic relationships that link the supply chain participants.

Two VBFSC examples• Country Natural Beef: A co-op of 60 ranch

families centered in the PNW that markets natural beef products through retailers and restaurants.

• Organic Valley: A national co-op with 1800 member farms that produces and distributes dairy and other products to retailers.

“Profit is not the only goal” (Organic Valley)

People

ProfitPlanet

Supply Chain Characteristics

• Deliver differentiated products and operate at a scale that provides some economies of size.

• Require high levels of performance and trust (including the sharing of critical information).

• Emphasize shared vision and decision making.

• Are committed to the welfare of all chain participants – generally seek to attain higher and more stable prices for producers.

Pay Price Comparison Chart

$16.18

$20.00

$12.21

$11.06

$11.83

$13.39

$12.05

$14.20

$10.57

$13.74

$10.97

$12.07

$14.00

$13.00

$11.89

$18.04

$16.75

$26.55

$24.55

$23.57

$23.75

$24.75

$22.50

$22.00

$14.30

$14.31

$14.43

$15.52

$15.14

$15.81

$15.56

$16.98

$17.10

$17.35

$17.18

$17.53$17.95

$18.20

$18.70

$16.90

$19.81

$12.00

$11.80

$11.88$12.37

$12.71 $12.90

$16.40

$9

$10

$11

$12

$13

$14

$15

$16

$17

$18

$19

$20

$21

$22

$23

$24

$25

$26

$27

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

CONVENTIONALBASEPAYPRICE-CWT(BasedonannualFMMOaverageblendpriceand2012estimate.)

ORGANICVALLEYBASEPAYPRICE-CWT(Midwest base price at 12.2% solids, with no component or quality premiums.)

“Commodity Price Tsunami”

• Whenever commodity prices go up, grower interest in participating in values –based supply chains goes down

Why they formed; how they operate

•“We formed this cooperative so that the individual ranches could preserve every possible bit of independence.” Doc Hatfield, CNB

•“We are a social experiment disguised as a business.” George Siemon, OV

IV. Other Specialty Food Business Examples…

Survey Results:

Very Important Factors in Choosing Suppliers (% of Firms)• 89%: Quality• 75%: Food safety practices• 65%: Year-round availability• 62%: Price• 59%: Local/regional sources• 40%: Logistics• 30% Stories associated w/ingredients:

Survey Results:

Benefits

0 10 20 30 40 50 60 70 80 90 100

Certifications

Source of Differentiation

Strong Marketing Messages

Flexibility in Logistics

Ease of Communication

Traceability

Reliability

Trust

Quality Assurance

Percent

Major Benefits of Purchasing from Known Farms

Can Identify Farms Cannot Identify Farms

Biggest differences

Survey Results:

Obstacles

0 10 20 30 40 50 60 70 80 90 100

Difficulty of Communication

Lack of Certifications

Lack of Flexibility in Logistics

Poor Quality Assurance

Lack of Trust

Liability Concerns

Unreliable Supply

Inability to Meet Volume

Inability - Food Safety

Cost

Inability - Year-Round Supply

Percent

Major Obstacles to Purchasing from Known Farms

Can Identify Farms Cannot Identify Farms

Few obstacles are noted by those already purchasing

Survey Results:

Where Are Products Sold?

Local25%

State-Wide7%

Regional33%

National24%

International11%

Scope of Retail Distribution

68% beyond state distribution

A Way to Market These Products

• “Food from Somewhere” (FFS) seeks to distinguish itself from “Food from Nowhere”

• FFS provides both traceability and also the possibility of staking out a claim of excellence

• “Local” is a subcategory of FFS

Survey Results:

Ingredient Purchases

Vertical Integration22%

Formal Contract23%

Informal Commitment

32%

Open Market Purchase

23%

Relationship with Principal Suppliers

Long-term relationships are typical

Survey Results:

Grain/Flour Purchases are Different

0 10 20 30 40 50 60 70 80 90 100

Grain/Flour

Meat

Fruit/Veg/Nuts/Herbs

Milk

Percent

Percent of Firms Able to ID a Farm Supplier: By Key Ingredient

Comments and Questions?

larry.lev@oregonstate.edu