by Bob Strong

No one will argue that agriculture is changing. Consolidation, technology, the expense of inputs – all have contributed to the disappearance of small farmers and ranchers. But understanding how the marketplace is changing is the first step in developing a sound footing for business, whether large or small.

“The consumer drives everything. It’s the consumer who puts these issues on the table, while suppliers deliver the products and services to consumers. The successful suppliers deliver solutions to consumer issues.” This, according to Rod Smith, Feedstuffs staff editor and writer, is “The New Economy.” Smith detailed his understanding of The New Economy at the 2004 Intervet Feedlot Business Summit, held April 7 in Garden City, Kansas. The summit offered an excellent opportunity to network with top beef producers and technical people.
Smith’s presentation was just one of the topics at the summit. Other speakers and their topics were: Jorge Estrada, ‘Retaining Top Personnel and Promoting from Within;” Leann Mayfield Saunders, Vice President of IMI global, “National Cattle Identification;” Dr. Chris Reinhardt, Intervet technical service specialist, “Found Money in Feedlot Operations;” and Randy Blach, executive Vice President of Cattle-Fax, “The Ups and Downs Occurring in a Post – BSE Marketplace.”

Rod Smith’s presentation, “The New Economy” detailed ways independent producers can succeed in a consolidating environment. The following information is taken in part from his presentation.

In order to understand consumers, one must understand consumer-driven facts.

•50 percent of food dollars are spent for food prepared away from home,
•51 percent of food prepared away from home is carried out (products must have carry ability and reheat ability),
•50 percent of office workers eat one meal per day in-office (breakfast and hand held meals on the way to the office),
•25 percent of all calories are consumed as snacks,
•10 percent of all food is consumed in the vehicle,
•40 percent of all consumers consider meals prepared outside the home ‘absolutely essential’ to the way they live,
•At 4:30 pm, 73 percent of consumers have no idea what they will have for dinner,
•32 percent are confused at the meat case about what choice to make and what to do with meat.

Consumer demographics are also important. It’s not just housewives purchasing food items anymore.

•55 percent of college degrees are earned by women,
•By 2007 there will be 33 percent more woman in college than men,
•Kids spend $10 billion on beverages and food,
•Kids influence 78 percent of grocery purchases.

Consumer issues: The “quality side” of brands
According to Smith, food must be produced in an environmentally sustainable humane way and in a safe workplace for consumers with little knowledge, patience or time. To them, brands are like guarantees.
One bad experience can kill a brand. The consumer or others try it, they don’t like it, they never buy again. This is true with: Consumers, Restaurants/Retailers, Processors, Alliances, Networks, Systems, Packers and Producers. The quality of brands is extremely important. Foodservice operators and retailers must have brands for menus and meat cases which are consistent every single time.

Size
Size becomes a critical issue in establishing brands. Larger brands are better and offer more benefits such as: consistency of quality and quantity and economics of sale. Larger brands also have better capabilities to assess inputs, assess knowledge, litigation and regulations, and match the scale of the forward player.
In turn, the disadvantages of size limits the growth or expansion possibilities of the smaller operation.
Smaller players need ‘harbor’ of size. They can’t expand without access to capital and may not have the portfolio or scale to access capital. Option one: take on substantial, undesirable debt. Option two: consolidate into an existing, larger structure to tap capital, technology and infrastructure to expand and innovate.

Danny O’Malia consolidated his family-owned grocery business with Marsh Supermarkets. He says, “As a family-owned small business, our access to capital needed to expand was increasingly limited. Now, we’ll have resources available to us not only to grow and survive, but also to prosper in a larger and very successful enterprise.”

Consolidation and rationalization are occurring in every industry, everywhere in the world, as producers seek competitiveness of scale to access technology, deal with regulations, produce brands, and trade across the world. Consolidation is irrefutable and irreversible.

Transaction Costs
In a commodity industry, production expands because it can, and as production expands, prices decrease. But in a commodity industry like agriculture, the ‘transaction costs’ to assemble production from hundreds of thousands of independent farmer-producers thru assembly points is staggering, and leaves little margin opportunity for adoption of technology and innovation.

If production, subsequently, is organized into production systems, the transaction costs decline and agriculture “decommoditizes.” In a branded, non-commodity industry, production expands because of demand. And as production expands, prices remain stable or increase.

Agriculture and the New Economy
The New Economy is not about money and wealth. The average household net worth doubled in the 1990s, some even tripled and the Dow Jones Industrial Average increased more than 300 percent in 1990s.
The New Economy is about computer chips, microprocessors and “electronic herds.” The new economy is about information and knowledge, and the New Economy is about consumers taking control.

A consumer can access information to determine what he or she wants, can access manufacturers/producers to say what he or she wants to, and what he or she will pay for it. A consumer has choices and buying power.

Consumer Takes Control
Because of this, an individual today can buy anything he or she wants from anyone, anytime, anywhere in the world. Companies, industries and producers that can’t or don’t respond will be replaced by those that will.
Companies and producers are accumulating huge scale through consolidation and rationalization. They access and deploy information and technology to produce anything, anyone could want. They deliver it anytime, anywhere in the world, and are reaping tremendous rewards.

How Does Agriculture Fit In?
Agriculture is producing food that’s healthful, nutritious, safe, convenient, and good tasting. It’s environmentally sustainable, in a humane and safe workplace. Agriculture is producing any kind of food product anyone could want anytime anywhere in the world. But agriculture income, especially at the farm gate, is in long-term decline.

Here’s the problem:
Recent statement by chief economist of an international lending organization to a conference of agriculture and food leaders: “There are too many of you. You’ve got to get rid of a lot of you.”

So now what?
Agriculture is an industry in which thousands of independent, individual producers make thousands of independent, individual production decisions. These decisions are based on what each one can and will produce. Too much of the wrong thing and consumers are turned off.

Here’s the solution:
Agriculture must consolidate its production and marketing decisions so that production and selling is more rational.

Historic agriculture investing was timed to cycles, resulted in low returns on investments, and were exposed to market volatility and other risks. The New Economy investor seeks higher, steadier return on his investments and reduced risks. Flight of capital from independent, individual farmers and producers is making consolidation more attractive and practical.

Inventory Ownership
In the future, the retailer will push inventory ownership to the food manufacturer/processor. The manufacturer will not be ‘paid’ for finished product until the consumer buys the product. This will cause increased risk, and cash flow will be ‘stretched.’

In turn, the manufacturer processor will push inventory ownership to the packer. The packer will not be paid for raw material until the consumer buys the finished product. The packer will have increased risk and his cash flow will be ‘stretched.’

The packer pushes inventory ownership to producer, and the producer will not be paid for animal until consumer buys finished product. This increases his risk and cash flow problems.

The Transformation
Old-economy agriculture will build into highly coordinated, highly specialized, New Economy food production systems. This system will be hard-wired, hierarchical, a digitized network of food production systems.
Anything that can be imagined can be done. Incumbent producers and farms will be threatened and must respond or be replaced. With this event, the winners will be in place, and agriculture as we know it now will be dramatically and radically transformed.

So What Have We Done?
We’ve created a system in which any-sized producer has the scale and structure to produce the quality and quantity of products consumers want, without over-producing, or under-producing, with diversity.
To accomplish this, the producer needs to produce brands to trade across the world. He needs to to match the scale of the forward player, to capture higher and a steadier process, and to reduce transaction costs. To do this, he will need to retain an attorney, environmental specialists and management specialists to deal with regulations and adapt technologies. He will need to make profits and to attract capital to expand.

Agriculture is Changing
The message that Rod Smith delivered is that agriculture as we know it now will be dramatically and radically transformed. Consolidation is irrefutable and irreversible. The old-economy agriculture will be built into a highly coordinated highly specialized, new-economy food production system. In the question and answer session following his presentation when asked how long he thought it would take for this change to take place Smith answered, “10 years.” Ten years is not a along time, considering there has been a great deal of change that has already or is taking place at this time.

To change or not is like the sides of a coin ‘heads or tails,’ you do or you don’t. This is more of a transformation like pouring several smaller quantities of a liquid into one larger container. ©

The articles referenced to from Feedstuffs, by Rod Smith are can be accessed at www.feedstuffs. com and are: Consolidation to Build Branded, Global House Volume 71, No. 6, Agriculture Told it needs to Consolidate to Participate, Succeed in New Economy Volume 72, No. 30, Consumers, Capital, Trade Driving Agriculture, Producers into Strategic “High-Value Game” Volume 73, No 5, U.S. Agriculture Needs Leaders, Truth, Not Populists, To Prosper and Succeed Volume 71, No. 38.