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.