Economics: January 2001

The food production (i.e., agriculture) and distribution system is experiencing unprecedented change because of advancing technology, increasing size of farm business entities, and worldwide competition. It is paramount that agricultural producers pay particular attention to the ever-changing desires of consumers, who value food products by their contribution to nutrition, health, taste, convenience, safety, and affordability. The food industry, beyond the farm gate, is responding to these consumers' desires by creating new food products that have significant health benefits. Mergers, acquisitions, and new partnership arrangements between food and pharmaceutical companies are evidence that these changes are expected to be permanent. The objective of the changes is to satisfy the nutritional and health needs of consumers through their consumption of food products. The challenge will be to provide consumers with tasty and healthy (trait-specific) foods that can be prepared quickly. It is likely that consumers of the future will be not necessarily skilled, creative cooks, but individuals who merely assemble products for a meal. Very few will actually shop for raw food ingredients and prepare the meal from scratch.

The American farmer or rancher is in the position of capitalizing on the needs of consumers. Investing in fully integrated systems will allow access to markets and opportunities for enhanced profitability. Alliances or business structures that allow the production, marketing, and distribution of food products within the structure will have lower transactional costs than multiple entities trying to piecemeal the movement and processing of food products from gate to plate.

There are successful producer alliances and networks in the United States: U.S. Premium Beef, American Crystal Sugar, Dakota Growers Pasta Company, and several others. The potential for more alliances and networks is unlimited. If a group of producers is interested in creating a successful one, they should consider the following:

1. identify the opportunities and competitive strategy, because doing so will capture added value within the food chain,
2. elect qualified board members,
3. hire an industry professional to prepare a feasibility study that examines the internal and external competitive environment,
4. follow recommendations identified in the feasibility study,
5. hire an experienced interim CEO with the skills to lead the board through the start-up phase,
6. raise capital through the sale of equity stock that would allow the business to survive difficult economic periods,
7. hire the best employees as opposed to the cheapest, because qualified human capital is priceless, and
8. stay in touch with the consumers and deliver what they want.

In the future, nearly all farm commodities should be in an integrated system so farmers and ranchers can capitalize on the added value generated through alliances and networks. The major advantage of the business model is the quick response time for relaying information derived from the consumer back to the farm or ranch. Expedited production and processing adaptations can be made in response to the needs of the consumer. Branding its products will also be beneficial for the alliance or network. Consumers will pay more for branded products and remain loyal when they feel the product has value.

Farmers and ranchers are capable of delivering identity-preserved products valued by consumers. Explaining the process of preserving the farm products' identity lends credibility to the branded product. These advantages will allow producers to realize additional profits. The beef industry is positioned well to capitalize on the alliance or network model, but the barrier to setting one up has been the amount of resources needed to organize the business. Often a few producers begin by spending a lot of time getting the model started. However, they also have a farm business to operate, which causes a conflict that ultimately means they will spend their time on their farm. It can take up to three years to get an integrated system functional. Most producers can't commit leadership to the start-up phase of the project for that period of time.

Farmers and ranchers have the most to gain by setting up integrated systems. For example, cow-calf producers have typically invested 70 to 80 percent of the total capital required to produce a calf from conception to the consumer. Currently, the majority sell their calves at weaning. If they would invest another 20 to 30 percent, they could own the entire beef production system from the farm to the consumer. Such an accomplishment would be exciting. Other farm commodities offer similar opportunities, and the future will be rewarding for those willing to accept risks.