Farmer Cooperatives chief economist advises: Ag must must join just in time system

Food producers can't afford to underestimate new food distribution systems dominated by powerful retail chains, says Terry N. Barr, chief economist of the National Council of Farmer Cooperatives.

According to Barr, the American public wants to know more and more about its food. “This puts demands on retailers, and it will put demands on agriculture as well.”

Based in Washington, D.C., Barr has been with the NCFC since 1985 and previously worked l4 years for USDA, where he specialized in coordinating forecasts and making economic analyses of farm policy.

The traditional system, where farmers grow a product and processors or packers send it through to wholesale and retail for some generic market, is on the way out, he said during the recent Agribusiness Management Conference in Fresno, Calif.

“It doesn't happen that way any more. First we identify the consumers, then we find out what traits they want in their food, we produce and bundle for those traits, and we send it on in the system with ensured traceability.”

With a nod to the swelling numbers of senior citizens, Barr said after a lifetime of planning for retirement, when people reach age 60 the last thing they want is to die from food poisoning. “That's why all the concern for food safety.”

While retailers, ever morphing into fewer, larger entities, navigate these changing times, producers need to pay attention to what retailers are saying and doing. Super retailers, those a decade ago bent on owning food production from “dirt to plate”, today shrink from the slightest risk of associating their coveted brands with suspected outbreaks of E. coli or listeria.

Collaborative networks

But these chains, through what he calls collaborative networks, still want to control their suppliers. And since they have the clout of electronic data exchange, shelf space, and access to consumers, they can, and do, impose their will on producers.

Wal-Mart checkout stands, for instance, link directly to suppliers, sharing real-time data to control “just-in-time” purchases, avoiding costs of maintaining inventory and running out of stock. Every time a bag of dog food is sold, the supplier knows it, and stocks can be replenished within a few days.

“Agriculture,” he said, is going have to figure out how to become part of retailers' just-in-time systems and how to organize to create the critical mass these units will need.”

Not only will producers have to accommodate supermarket chains, they will have to deal with other changes in ways people get their food. The food service business, expected to prosper with an aging population, and more emphasis on convenience foods and away-from-home eating are changing what is expected from producers.

“It's all about retailers putting together value chains and taking advantage of transportation, logistics, finance, communication, and verification. This is what a Wal-Mart or a SYSCO is all about. They don't want to own all the value chains, but they do want to combine them in their networks.”

What's more, he added, pressure for export markets from international sources is mounting, and little in the farm bill promotes new export markets.

China as competitor

He predicted China will become a very formidable competitor. It is naïve, he continued, to imagine that U.S. exports will replace the massive agricultural production capacity of China. He expects, in fact, China will displace U.S. exports to the Pacific Rim, at least until the purchasing power of China's consumers is great enough to absorb more of what they produce.

Around the world, he said, one problem “is the speed at which we've been able to employ the low labor force has been much faster than our ability to raise the purchasing power of that labor force.” He expects it will take a decade to adjust.

“All this tells me our farmers are either going to find new markets or get the resources we don't need out of agriculture. If the population demographics are right, we won't need all the production, and if land values keep rising, we aren't going to be competitive anyway.”

Barr cautioned against relying too long on a new business strategy once it is in place. “Your strategies may last only a year, and you will have to adjust to these big virtual collaborative networks. We are going to learn a lot of things over the next decade about how people want to consume food. Changes in how food is delivered will force changes back through the system to producers.”

Co-op attitudes

The changes also summon adjustments in attitudes of farm cooperatives, Barr said. “We need to focus on who the actual consumer and customer are. One problem with cooperatives, and much of agribusiness, is they think farmers are their customers. In today's world their customer is the consumer, and farmers have to provide the bundle the consumer wants.”

At the same time, Barr said, he sees more opportunities than ever before for producers to reposition themselves to the changes.

“Profitability in agriculture still will have to be on the basis of productivity. But we may have to rationalize land values, particularly the increases over the last five years, to see if they are consistent with the value of agricultural production.

“Agriculture will probably have to spend less time focused on production technology and more on marketing strategies. That's part of the fundamental shift we face. Farmers love their tractors and equipment and irrigation systems, but at the end of the day that's not what will keep them viable as we go forward,” Barr concluded.

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