Extension Communications
3614 Administrative Services Building
Ames, Iowa 50011-3614
(515) 294-9915
1/14/2000
Contacts:
Mark Edelman, Extension Economics, (515) 294-3000, x1edelma@exnet.iastate.edu
Del Marks, Extension Communication Systems, (515) 294-9807,
dkmarks@iastate.edu
PLAIN ECONOMIC SENSE, Column 395
For release Jan. 17, 2000
How Will Iowa Farms Fit Into the New Industrial Agriculture?
By Mark A. Edelman
Extension Public Policy Economist
Iowa State University Extension to Communities
(Second in a series)
Several types of farms are emerging amidst the industrialization of agriculture. Many Midwestern family farms will face a decision as to what kind of farm they wish to become. It is important to understand the differences in order to understand what the keys to success might be.
Type 1. Commodity Farms will continue to buy and sell in open markets. As processors and supply chain integrators develop captive supplies, the commodity farms risk the potential of becoming residual suppliers. Historically, commodity farms have relatively high capital requirements and have been driven toward achieving higher volumes and greater production efficiency. Profit margins in commodity agriculture have dramatically declined over the past three decades.
Commodity farms will continue to face periodic potential for over supply relative to market demand. They are likely to continue to see more price variability and risk, perhaps with less government intervention over the long run. The key to survival will continue to be managing risk, production efficiency and ability to hang in there during low profitability, perhaps via relying on accumulated wealth, other ag enterprises and off farm sources of income.
Type 2. Supply Chain Farms producing specific products under contract with larger corporate entities. Supply chain farms are selected to join a network based on high volume and efficiency criteria. Contract supply chain farms will increasingly rely on the supply chain to provide genetic traits and key inputs used in production. Supply chain managers may increasingly specify financing terms, production processes and/or criteria for pricing and delivery of the product.
By joining the supply chain, a farm reduces income risk and gains a preferred position in supplying supply chain processors to meet consumer demand. The farm gains access to proprietary information, research and education resources targeted to address unique problems and management strategies for the supply chain. Consumer tastes and preferences are communicated through the terms of the contract. Evaluating or choosing a contract is the key to success.
Type 3. Ownership Integrated Supply Chain Farms create networks and alliances that help to assure markets and generate returns from beyond the farm gate. Prime examples are farmer groups working through the process of creating their own start ups/value added enterprises and/or new co-ops, limited liability companies and joint venture partnerships with existing agribusinesses and entrepreneurs with industry expertise.
These farms self select based on relationships, interest and capital. However, similar to the previous farm type, the ability to evaluate contracts is still important. These farmers also increasingly rely on the supply chain for genetics and/or other key aspects of inputs, production processes to be used and criteria for pricing and delivery of the product.
Type 4. Direct Marketing/Specialty Farms sell directly to consumers, restaurants, niche market or retail outlets. These farms have developed a consumer marketing focus instead of a generic commodity focus. Consumer and retailer surveys and focus groups help to identify the quality traits, product reputation, brand recognition and market premiums that can be generated.
These farms may produce specialty products or use production systems that may be more labor intensive and higher cost. Therefore, these farms tend to be lower volume operations with wider margin than other farm types. Small scale processing, packaging and marketing promotion are often used to enhance opportunities for local or regional brand recognition. Development of the Internet, E markets and overnight mail delivery systems have created new venues for these farms to market nationally and internationally.
Type 5. Part time Farms have a significant share of family household income being generated from off farm sources. Size and scale of enterprises vary widely for this farm type. These operations are often less efficient and higher cost farming operations. This farm type represents the largest number of farms in Iowa and the United States. However, they only account for a small portion of the food produced.
While some part time farm enterprises can be very profitable, on average, the farm share is not sufficient to support family living without off farm income. Part time farms provide important contributions to the economic base, labor supply, volunteer leadership and community culture. In addition, they often provide lower cost of living and intangible amenities to family life.
Type 6. Combination Farms have enterprises involving more than one marketing and production system. This allows some farms to diversify revenue sources and market risks and/or to experiment with a new pilot venture without jeopardizing the whole farm.
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