Value chain communication

Recently, I’ve had the opportunity to speak with reporters about current events in the beef value chain. (You can follow the links that were posted in an earlier post) As I was trying to think about the industry response from an agricultural economics perspective, where value chains are best seen as demand pull chains and consumers are not vilified for attempting to maximize utility, I tweeted out a link to my dissertation. A reporter from Realagriculture.com took the time to skim it and I spoke with her about my findings a week or so ago. You can read the results of that interview here.

One of the main findings of my dissertation was that farms that open lines of communication with downstream firms — this could be backgrounders, feedlots, or consumers depending on the organization of the channel — perceive that their performance is better than other firms in the industry. Now some in the industry see this and immediately think “How can I effectively open lines of communication with consumers about whether my animals are appropriately meeting their needs.” The truth is, an individual farmer probably cannot (and probably should not) do this as the marginal benefit of this endeavor will be quite low and the marginal cost will be quite high. However, the industry groups probably should be doing this on a regular basis; something that was pointed out by Andrew Campbell. I am certain that this communication is already going on to varying degrees across different producer groups and organizations. What would be fantastic is if that information was passed back up the channel to feedlots, backgrounders, and cow-calf operations for them to make use of the information as they see fit. Maybe it is and it just doesn’t get to assistant professors.  I don’t know.

The fact that is may not be economical to purposefully open lines of communication with a random consumer does not mean, however, that the upstream firms should not open lines of communication at all. It may mean that it may make more sense — both practically and economically — to open these lines of communication with their immediate customer. The reason being is that when operating in a value chain, the job of the firm to make sure that the products they put through the system help the next firm meet the needs of the next firm’s customer. Really, it is all about helping your customer meet the needs of their customer. So, if we think about that, that means that the job of the cow-calf farmer, from a marketing perspective, is to discover the needs of the feedlot owner/manager, and produce cattle to meet this firm’s need. Just as it is the job of the feedlot manager to produce fed cattle to meet the needs of the packers, and the job of the packer is to meet the needs of the retailers, and the job of the retailers is to meet the needs of the consumer.  We can only do that with communication followed by action.

So my question is this: given the industry critique of Earls switching to a U.S. based supplier for its beef (and later backtracking on this) was that Earls did not consult with the industry before making the move, how often does the industry consult with their customers to discover how current supplies are meeting demand?  Recent data from the Western Canadian Cow-Calf Survey shows that 80 percent of respondents market calves through an auction. How often does the producer even know who purchased their calves? If they know, how often did the producer contact the purchaser to see how the feeders performed in the feedlot? How many producers are signed up for BIXS so they can use carcass data to make future production decisions? This is all part of value chain communication. If we don’t know who our customer is or how our product performed at the next stage of the chain, how can we be sure the changes we make in breeding programs, grazing management, preconditioning protocols, etc. help the feedlot help their customer?

The future of beef production will likely be more data and market driven than it is today. Demand from consumers for transparency, information, beef with a story, is more likely to grow rather than wane. The question is, are we prepared to meet these needs before they become news stories, or are we happy to react to events as they unfold?

 

Does Agriculture have an Agricultural Economics Problem?

I’m beginning to think that the agricultural community has an agricultural economics problem. I’ve come to this position following the news about Earls herehere, and here, and the Canadian agricultural industry’s response.

They’ve even begun to disparage the last bastion of purity, marketing. I guess marketing is only good when the label is promoting Canadian products? Many in the industry are touting the benefits of marketing when the object being marketed supports their prior position.  For example, McDonald’s Canada promotes their products by stating that they use 100% Canadian beef.  Marketing. They also promote McDonald’s working with producer groups on sustainable beef, which they hope to begin sourcing from certified (there’s that word again) Canadian farms in the near future. That’s marketing as well. Go figure.

Even politicians, who would think based on their prior policy positions would be grasping the free market with both invisible hands, have recently turned protectionist. Free trade deals only mean so much, I guess. The Premier of Saskatchewan, the Hon. Brad Wall, has recently suggested that Canadian consumers should support Canadian farmers and stop going to Earls.  Many management scholars would disagree with the Hon. Mr. Wall and the Hon. Mr. Ritz, however. I’m reminded of a quote by Peter Drucker, who famously stated,  “Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”  You can read more about the importance of marketing in that socialist rag Forbes here.

As I see it, the problem lies in the fact that few in the industry (or at least the ones with the megaphones) do not seem to have taken an agricultural economics course. Maybe they have and they failed it. Maybe they did well in the course(s)and just forgot all of the information. I can’t tell the difference from where I sit.

To be clear, I’m of the belief that free markets work. Given information, and a little entrepreneurial spirit, different value chains emerge to meet the needs of a differing set of consumers and consumer preferences. When a firm or industry attempts to market a homogeneous product to heterogeneous consumers, there are several consumers who needs are not perfectly met. Sometimes that is the most efficient outcome.  Sometimes it is not.

The issue over Earls and the histrionic response from the Canadian agricultural industry, has led me to believe that a brief review of some key economic concepts may be in order.  I am outlining these in the form of questions; some I have added further questions to, some I have not.

  1. If you do the math and the cost to get verified isn’t worth the premium gained from getting verified, then don’t get verified. But also don’t complain when other outlets choose to purchase from a verified supplier.
  2. If the answer to (1) is no, should different value chains be encouraged to develop to more appropriately meet the needs of consumers?
    • This acknowledges the fact that different value chains marketing to different consumers are not, in fact, directly competing with each other.
    • If a consumer wants an organic product, for example, they are not going to purchase a non-organic product, no matter how much it is stated that they are equally safe/healthy/etc.  Don’t worry about it.  Move on.
    • If it upsets you that a private company went to another supplier to find a product that more closely met their need (verification), then get verified and win back the customer.
  3. Does agriculture think that all consumers should value all attributes in the food they consume in the same way?
    • Should all steaks be mandated to be served well done? If not, why not?
    • Are all wheat varieties created equal?
      • Why is it that utility functions based on soil type and weather patterns are valid, but those based on processes and perceived ethical differences are not valid
  4. Does agriculture think that food service firms are in business to serve agriculture or the customer?
    • Does agriculture understand that their customer is, in fact, Earls.  If your customer leaves you, should you yell and scream and vent on Twitter, or should you examine your business model to see if there are ways you can adapt to meet these needs.
  5. Does agriculture know that there is, in Canada, certified humane beef from Canada.  It is sold in Sobey’s under the Aspen Ridge (R) brand.  Perhaps Earls inquired about the ability of Aspen Ridge to be a supplier, I do not know. I don’t think Premier Wall knows either.  Perhaps Aspen Ridge did not have the capacity after their contract with Sobey’s to meet Earls needs.
  6. Does agriculture understand that an unverified standard is just that, unverified. Just because a code of practice exists, does not mean that every producer has read it cover-to-cover and could pass a test on it. Conversely, not being certified does not mean that farms do not abide by these practices. It just means that they are not certified.
    • Would a rancher pay more for a certified bull or just a bull where the owner said, ‘trust me, he’s a fertile one’?
    • Would a certified public accountant be able to charge more than a non certified accountant? Why do we have all these CPAs running around, I wonder?
    • Would a certified financial planner be able to charge more for their services than an individual who stated they know everything there is to know about financial planning? They took the same classes and everything…
  7. Does agriculture know that we live in a demand pull world.  A supply push mentality may not always work. It may work sometimes, but perhaps not every time.
  8. Does agriculture know that antibiotic-free process standards do, in fact, allow for therapeutic treatments in livestock. Most often, these animals are treated and then moved into a conventional value chain. What it does mean, and what agriculture is good at misleading the public on (ahem, Mr. Ritz) is the use of ionophores and other feed additives that, as antibiotics, treat bloat, acidosis, etc. and help with weight gain. Again, if the cost/benefit from using these safe tools is greater than the benefit of not using and marketing through a different channel, than stay with conventional production. However, let’s not try to bully other Canadian (and U.S., N.Z., Australian, wherever) farmers who choose a different practice and market for their beef system.
    •  This does not mean that farmers cannot use these tools. It may mean that marketing options are limited if they are used. Again, if the returns from this system are greater than the returns from a different system, then use the one that makes you the farmer the most money. Go ahead and maximize profits as Milton Friedman intended.
  9. Does agriculture have a problem with marketing? Does agriculture understand that when McDonald’s markets their beef as 100% Canadian, that is in fact, marketing! If beef from other countries is so bad and so unsafe, then I would hope that Mr. Wall and Mr. Ritz would do their best to tear up those free trade deals they were promoting a few months ago.

Assorted thoughts related to #Earls

  1. If hormones = sustainability in Canada, why ok in beef but not dairy?
  2. All the folks saying they are going to boycott Earls should provide a dollar figure of how much they actually spent there in the past month/year.
  3. Listen to the head of the CCA for a well thought out industry response. http://www.cbc.ca/news/canada/calgary/programs/eyeopener/earls-moves-away-from-canadian-beef-1.3557649
  4. Canada working on certified sustainable program — should they drop the ‘certified’ word based on ag backlash that will come from those that don’t make the grade?
  5. Out of curiosity, how many tweets were made using a BlackBerry device from the cab of a Versatile tractor?

The Economics of Economics Textbooks

A few weeks ago I had the pleasure of having a meeting with Heather Ross, an instructional design specialist at the University of Saskatchewan, where we discussed open-access textbooks. The meeting came about after a conversation on twitter where I mentioned that I was considering adopting an open-access text for AGRC 113, a course that has a heavy micro-economics base but tends to drift into more practical applications and current issues in the agri-food industry. In the past three years, I have gone through the gauntlet of texts. I started with an agricultural economics text (Drummond and Goodwin), then changed to the more popular microeconomics texts. In years 2 and 3, I used McConnell, Brue, Flynn, and Barbiero and Mankiw, Kneebone and McKenzie. I decided to go away from the agricultural economics texts as 1) I think it helps agricultural students to see the broader picture, and 2) these texts were the ones used by ECON 111, the main prerequisite for my course.

However, not all students take my course immediately after they take ECON 111 (for whatever reason). Therefore they get stung with the pain of selling their text back to the bookstore after ECON 111 only to have to buy a newer version at a higher price point a couple semesters later. The Economist had a recent post that discussed the steep increase in textbook prices (which is in itself an economics lesson in captive markets and inelastic demand). This led me to a search for a better option for these students while also not causing undue financial strain on students who are taking the course in the recommended sequence.

Through BC Open Campus, I was able to review a completely open-access text authored by Timothy Taylor of Macalester College that I think rivals those of McConnell and Mankiw. In terms of economic material, the Taylor text covers the same material as the McConnell and Mankiw texts, while also providing more detailed coverage on information, risk and insurance, and financial markets. These two topics are pretty important in agricultural systems, so I view their inclusion as a real advantage. The chapters give adequate detail of economic concepts while also including text boxes that show how the concepts can be applied to current issues in the world. The Taylor text also provides a variety of self-review questions at the end of each chapter that allows students to see which concepts are clear and which require further study. For instructors, the publisher provides access to all the normal accoutrements (solutions manual, PowerPoint slides, test bank) that other non-open-access texts also provide.

In terms of benefit cost, I think that the Taylor text is a clear winner. It provides the a strong foundation in the core concepts of microeconomics (scarcity, consumer choice, supply and demand, market structure, externalities, and trade) while also providing detailed material on two other important topics: risk and information and financial markets. It does this a cost much below those of McConnell and Mankiw. One negative of the Taylor text is that it is written for undergraduate students attending U.S. colleges and universities. While this may be an issue for some students and will require a bit of legwork on my part to bring in Canadian examples, I still feel the benefits of the open-access text far outweigh the costs.

Farm Size and Span of Control

Two posts in one week…a record!

Thanks to the muse that is twitter, I have another topic I felt was worthy of a post. Michael Pollan shared a tweet on the decline of the small American family farm.

Here is the link to the entire Washington Post article if you are interested.

This actually makes a good topic on management issues in my AGRC 113 course that focuses on issues and institutions in agriculture.

Over the past 50 years, why has farm size increased to the extent that it has?

For one, the productivity gains from new machinery is amazing compared to what farmers were using 50 years ago. Just think of how much more difficult planting would be if you actually had to steer or know when to shut of the individual units! Overall, the innovations in machinery technology have enabled better managers to farm current acres more efficiently. This brings up two managerial concepts, span of control and managerial resources. Through more efficient technologies, managers are able to ‘control’ more acres in the same amount of time. Or, put differently, by using the new technologies, managers release additional managerial resources (i.e. time) that can be used in other areas of the farm. Given the choice set of where these managers could invest this time to get the highest return, some may choose to invest it in farming more land. As more and more farmers make this choice, average farm size increases.

Secondly, as some have pointed out, there are still small farms in the U.S. and elsewhere. What has been evident when looking at the data is a hollowing out of the distribution as some medium-sized farms have decided to exit the industry (or get bigger). Two fact sheets from the USDA help illustrate this point although both are a little old as they use data from the 2007 Census of Agriculture. These fact sheets report farm size as a function of sales, so price increases that occurred during these periods may skew the data somewhat. In the first one, we see that the number of very small farms (less than $10,000 in sales) is growing and farms with sales between $100,000 and $249,999 have declined somewhat. In the second one, we have more info and more questions. We see that the number of farms with sales greater than $250,000 have grown since the 2002 Census of Agriculture, and I think this is good. One possible source for this increase is the decrease in the number of farms with sales between $10,000 and $249,000.

The other factor that might lead to larger farm sizes is the use of mobile technology. With smartphones and tablets now the rule not the exception, today’s commercial farmer is always connected to markets and information that affects their farm and industry. With greater connectivity, managers are only a text or call away from their broker, their herdsman, their combine operator, or their family. This again increases the span of control and frees constraints on managerial time as through this technology, farmers are able to manage the same amount of tasks more efficiently.

There is probably more nuance to it than this, but I have to get back to working on paper.

Food dollar nonsense

I am constantly reminding myself that I need to write more blog posts, but it seems that something else always distracts from the writing.  Maybe it is just not having a topic that I wanted to write about.  Well, as luck would have it, yesterday I saw a tweet that stoked the fire.

This is one of the kinds of things that really gets me shaking my head. I mean, what’s the point of it? Yes, a loaf of bread in Canada can run anywhere from $1.99 to $4.59, but does that mean a bushel of wheat should be worth $270?

What this tweet misses is the fact that when I want to make a sandwich, I do not want to have to go and find a wheat farmer who has high quality wheat so I can make my own bread. I also assume said farmer doesn’t want to sell me just enough wheat so I can make a single loaf of bread as I do not have the capacity to make 100 loaves at the time. Either way, now that I have all this wheat, I need to mill it into flour. I do not own such equipment, nor do I want to.

What we often forget when we see food dollar comments, is the price for a good (in this case a loaf of bread) includes much more than just the raw input. It includes the costs of coordinating the value chain so a loaf of bread can be in my grocery store when I want to buy one. It includes the costs (and normal profits) for several firms within the channel, including the grain handlers, the millers, the bakers, the transporters, and the grocery stores. So a farmer gets $0.07 for a loaf of bread, which all things considered, seems pretty close. In order for firms to receive (earn) higher prices for their inputs, they need to transform these inputs into usable forms for the consumer and get the inputs to where the consumer wants them. Then, and possibly only then, will farmers receive more than $0.07 for a loaf of bread.

University Committees, Degrees, and Branding

As a faculty member, I have the privilege to sit on a number of department and college committees. One of the more interesting committees I sit on is the undergraduate programs committee for our college. In one of the meetings, the topic of residency and degrees came up. In terms of this discussion, residency means how many credits were earned at a specific institution. The issue before the committee is, how many credits should a student have to earn from a particular institution before they earn a degree from that institution. Is it 30 credits? 60 credits? Does it even matter? There was a lively discussion about this, and I’m not sure how the decision will go, but here are my thoughts on it.

First, it is a complex issue. One one hand, we want to encourage students from other institutions to come to our university and take our courses, and establishing higher residency requirements may limit the number of students who transfer to, and eventually graduate from our institution. On the other hand, the residency requirement acts as a form of ‘quality control’. By having some minimum requirement, we are able to gather more information about the quality of the student before they walk away with a degree with our university’s name on it. At its heart, I see this as a branding issue, and as a quality control issue. To illustrate my concern, I used a manufacturing example in the meeting. Would Company A feel comfortable branding a product where 75% of the process was conducted at Company B? What if it was 50%? While this is not a perfect analogy (as these companies have established strict guidelines as to what has to happen to satisfy the terms of the contract) the issue is the same. Without any way to monitor quality at the first institution (where a bulk of the education takes place), the risk falls entirely on the company with the brand. In that case, I think gathering more information (in terms of credits) is probably the sound strategy, but maybe I am missing something.

If you have any thoughts about this, I would be happy to hear them.