Beyond the Commodity Market

December 12, 2017

By David Perry

In the first half of the twentieth century, we became increasingly concerned about how we could feed a growing population. In the decades after World War II, we answered this question, at least for a time, in a period that is now referred to as The Green Revolution. This period was defined by the adoption and sweeping use of four agricultural technologies — plant breeding, synthetic fertilizers, crop chemicals, and, beginning in the mid-90’s, genetic modification of plants. Alongside these technologies came changes in the supply chain: we began to treat most crops like commodities and, with the expanded use of elevators and railways, we were able to store and transport harvests in bulk.

As industrial agriculture expanded, more growers entered the commodity market. Commodity crops, generally non-perishable, storable, and transportable, are assumed to meet generic commodity quality standards. At elevators, commodity grains are blended to meet these commodity specifications without regard to source, seed, or process by which they were grown.

Fortunately, these changes were effective. As a result of the industrialization of agriculture, we were able to feed as many as one billion people that we would not have been able to feed otherwise. Unfortunately, this system provides little incentive to growers to invest in quality, as they are paid primarily for quantity. The result is an overall decrease in the quality of our food.

Today, buyers and end-consumers are increasingly willing to pay for high quality, sustainably produced, and identity preserved food. We see this with the local food movement, the response to the “organic” label, and the diversification of dietary preferences. Growers locked in the commodity market, though, cannot respond to consumer desires; if they invest in differentiating their crop, their work is undone at the elevator where the identity of their crop is lost in the blending process.

That being said, we have come a long way in terms of logistics since The Green Revolution. We now have the technology to bring crops directly from farmers to buyers, preserving identity along the way. And we can do this on a meaningful scale. When we preserve crop identity, we enable specialization; farmers’ efforts to differentiate their products by quality and management practices are rewarded by consumers’ willingness to pay a premium for food that meets their desires.

There are many agricultural products for which specialized, premium markets have been established. Coffee comes immediately to mind. Thirty years ago, we all bought Folgers or Maxwell House coffee, some of the few options on the shelves. Now, we can purchase coffee grown by smallholder farmers in Ethiopia, Brazil, or Indonesia. Not everyone wants this, but those who do are willing to pay substantial premiums, with the yearly retail value of the U.S. specialty coffee market at around twenty-seven billion dollars. This is good for coffee connoisseurs and it is really good for coffee growers, many of whom have established profitable operations in microclimates where distinctive coffees are produced.

In the beef market, consumers can pay a thirty percent premium for “Certified Angus Beef,” and many do.  There are standards associated with this label that suggest certain levels of marbling and tenderness. Ultimately, though, the USDA’s Agricultural Marketing Service focuses on the appearance of the cow in defining the label — the cow’s coat must be at least 51% black. Also with beef, the way in which the meat is cut can dramatically increase its value, as certain parts of the cow are considered specialties or delicacies. Consumer cut preferences vary from country to country, and ranchers who respond to these preferences can make significantly more per pound than if they were to sell all of the meat at a single, blended quality level.

The specialty markets achieved in products such as coffee and beef can also be achieved in segments of the grain market. There are flour mills searching for high-protein wheat for pasta and breads. Craft brewers, on the other hand, often look for grains with low protein content. Today’s system mixes wheat indiscriminately, meeting neither desire. If the crop were segregated by quality, the needs of buyers willing to pay a premium could be met, even if the overall quality of the crop did not change. Growers make more, and buyers get what they want.

The supply agreement that Indigo announced today with Grain Craft is an example of this type of specialization. Indigo contracts directly with farmers to produce wheat that meets the milling and protein standards that Grain Craft needs, and for which it is willing to pay a premium.  In return for producing wheat of this quality, Indigo pays U.S. farmers an additional 43 cents per bushel over the commodity wheat price.

Specialization gives consumers access to the kinds of foods that are important to them, whether they are looking for nutrition, flavor, or cleaner means of production. Through Indigo’s microbial innovations, it is not hard to imagine water friendly, sustainably sourced, chemistry free, and reduced fertilizer crops making their way into the specialty market on a large scale, as well as improved standards of Fair Trade that better ensure that US and international farmers turn a profit. This system fundamentally aligns agricultural practices with consumer preferences. Premised on farm-to-fork traceability, specialization gives us the opportunity to dramatically improve the quality and sustainability of our food system — to the benefit of growers and consumers alike.

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