What can farmers do to give their commodity products a competitive edge and reap improved returns?
Make them somehow stand out from the competition, suggests Bruce A. Babcock, professor of economics and director of the Center for Agricultural and Rural Development at Iowa State University at Ames.
"Basically, you can make money by one of two ways: you can be the low-cost producer of whatever commodity you deal with, or you can create a differentiated product, have some control over quality and quantity, and try to behave like consumer-oriented firms worldwide," said Babcock.
A native Californian with a Ph.D. from the University of California, Berkeley, Babcock returned to familiar ground to address the Spring Outlook Conference of the California Chapter of the American Society of Farm Managers and Rural Appraisers (ASFM&RA) held recently in Sacramento. He was part of a panel dealing with valuing product attributes.
So just what is a differentiated product? From an economist’s view, he said, consider what happens if a product’s price is increased.
"If sales of the product fall to zero, there is no product differentiation." Consumers refuse to pay a penny more when they can buy the same product next door.
"But, if, in fact, you can raise your price a bit and sales don’t fall to zero, then there is some perceived difference in the product that some part of the population is willing to pay extra for," he explained.
The complete opposite is a commodity product sold for the same price from producer to producer, such as No. 2 yellow corn, hogs, soybeans, or gasoline, for which there are substitutes from other sources.
Examples of differentiated products are Frito-Lay’s Tostitos snacks chips labeled with "Zero Grams Trans Fat," catsup products made with low-fat formulations or packaged in inverted bottles, and wine appellations or sub-appellations based on microclimates. Another is Home Depot’s commitment to sell wood products from environmentally sustainable forests and flooring made from recycled materials.
"Commodity producers are price takers. If your price is greater than the cost, you can make a profit. If your price is lower than the cost, you lose money.
"But with a differentiated product, you can gain a competitive edge by entering a new market sector that has differentiated standards, such as new animal-welfare standards adopted by the fast-food industry."
Consumers may be prepared to pay more for a product if they perceive it has superior or unique taste, has superior appearance, is healthy, or is good for the environment.
Keys to achieving acceptance for such products include creating a better product, investing in adequate marketing, controlling production costs, and maintaining superior quality.
But, he added, it is also important to develop credence among consumers willing to pay a premium for a dependable supply and quality or convincing certification, all the while keeping production costs in check.
Producers also must be vigilant to sustain the value they achieve with differentiated products. "Whenever you make money, imitators will come in to eat that margin away and drive profits to zero. So you have to create some kind of barrier to keep competitors away."
Barriers may be regulatory, such as the U.S. sugar industry’s barrier to imported sugar, or they can be technological with products fully traceable back to their source, or they can be marketing with brand identities.
The European Union uses geographical barriers for beef, cheese, beer, and other products by allowing those products to be produced only in certain regions. Parmigiano Reggiano cheese and Kalamara olives are examples of these barriers Babcock said are intended to eventually wean producers from government subsidies.
A common route to product differentiation in the U.S. is branding for consumer loyalty, examples being Sun-Maid raisins, Sunkist citrus, or Ocean Spray cranberry products. Babcock noted, however, that creation and maintenance of a successful brand is expensive.
For another perspective on valuing product attributes, Jim and Mary Rickert of Fall River have differentiated their Prather Ranch beef operation in at Macdoel in Siskiyou County with a system based on a closed herd and slaughter of about 1,100 animals per year.
Key in the attributes are high-quality cuts of beef from animals identified with tags from birth to through processing and complete records to ensure traceability.
They also meet rigid standards to provide alternative products such as organs and hides for pharmaceutical raw materials and bone materials for surgical devices.
Tell ranch’s story
To make their products attractive to consumers, Jim Rickert said they have told their story of a sustainable, humane, environmentally friendly system based on employment of personnel trained in food safety and compensated for retention. "We think it is really important to emphasize in our promotional pieces the families that work to produce the food we supply."
Mary Rickert said they also grow their own high-test hay on the 21,500-acre, vertically integrated ranch. She said the 15-year effort to refine the system has been rewarding but required great diligence. "It is not for the faint of heart."
Another panelist, Roger Hancock, corporate director of food safety sanitation and quality for Albertson’s, Boise, Idaho, said value in the highly competitive retail food industry is, from the consumer’s perspective, of broader appeal than price alone.
"Food safety is a big concern and goes all the way back to the farm," Hancock said. "I urge you to work with regulatory authorities promote food safety to create value for your products.
"We want to differentiate ourselves as a retailer, so we look for what the farmers can provide. Consumers tell us the first thing they want is a clean store, and we handle food as if it were going to feed our own families."
Albertson’s is also alert to food security issues in light of potential terrorist attacks on the food production and distribution chain. He said those who secure their segment of the production chain will benefit tremendously because consumers are willing to pay for a broad array of safeguards.
He said his company is also quite sensitive to its role as "the public face" of the food industry in the minds of its customers. Despite the several stages between the farm and the retail store, the public tends to bring to the retailer their complaints about nationally branded products.