The chained farmer and the sorting of winners

Farmer Friendly or On the way to Planet Proof? Day sales, pool contract or fixed price contract? Free master or contract? Cooperative or listed? Auction or contract? These are all choices made by demanders and suppliers to shape relationships in the chain.

And when there are choices, economists immediately wonder which choice is the most efficient in a given situation. This includes the American professor of agricultural business economics Michael Boehlje. Such issues had already been studied outside of agriculture, and he linked these insights to his extensive knowledge of American agriculture. This led to a much-cited scientific article in 1999: Structural changes in the agricultural industries: how do we measure, analysis and understand them?

Relationships in the chain
Boehlje named 3 factors that seem to be decisive in shaping relationships in the chain. First of all, the degree of programmability (controllability) of the production. If it is large, you can produce according to the customer's specification (for example, a certain variety of apples or a large quantity of spinach for an advertising campaign). Then you enter into a more intensive relationship with each other through a contract, instead of waiting for the other to show up at the auction.

The same applies if you have to make specific investments in machines or in knowledge for a particular customer. Even then you want guarantees that you can earn back your investment over a longer period of time. This will soon be the case, for example, with the GLB eco-schemes: for a contract of 1 year you will not be installing underwater drainage in the peat meadow. Then you want a contract of perhaps 25 years, so that you can build your business strategy on that.

Split profit objectively
A final factor is the fact that the market assumes that you can split the profit between the parties in an objective manner through the price. Sometimes that doesn't work. I don't know of any good agricultural examples that quickly. But imagine that as a farmer, with a lot of knowledge of early germination stages of plants, you team up with an artificial intelligence researcher from the TU Twente to develop the best weed recognition software. If this is a success, is this to the credit of the arable farmer or the ICT nerd? Hard to say, then the smartest thing to do is to set up a joint venture and both become shareholders.

With his analysis, Boehlje foresaw that the food chain, including agriculture, would increasingly resemble industrial industries. Due to ICT and genetics, among other things, the process is becoming increasingly manageable. Already in the opening of his article, he wrote that the industry dominated by family-based, small-scale, relatively independent companies is evolving into large companies that are much more tightly integrated into the rest of the chain. And - he warned - such an integrated industry is treated the same as other industries when it comes to environmental regulation. They cannot rely on sympathy for the small family business.

Thinking in food systems
His insights arose from the chain thinking of the 90s. That was partly indebted to the concept Agribusiness that Prof. Ray Goldberg had introduced at Harvard University in the early 60s. We still use that to indicate that although agriculture is 1,5% of the economy, the total complex is 7%. In the meantime, thinking in terms of food systems is gaining ground, because we are also receiving attention for the role of, for example, banks and NGOs.

At the beginning of this century, a team of researchers led by Gary Gereffi looked at chain organizations in many sectors (but not in the agricultural sector). They found that there are 5 'ideal types'. At the one extreme, the classic market with many buyers and sellers for a standard product, as we learn in the economics books at school. And on the other, companies that do almost everything themselves, from growing crops to delivering to consumers. Both the Belgian Colruyt and farmers with their own sales or very short chain seem to be supporters of that model. Entrepreneurship is choosing the right organizational form. The economy sorts out the winners.

Krijn J. Poppe

Krijn Poppe worked for almost 40 years as an economist at LEI and Wageningen UR and now holds a number of advisory and management positions. For Boerenbusiness he dives into his bookcase and discusses current developments on the basis of studies that have become classic.

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