Farmers are ingredient suppliers and should handle the volume knob themselves to control pricing

Three years ago I stated very unpopular “Farmers are no food suppliers. They mainly produce anonymous bulk ingredients, that most of the time are exchangeable. This system looks like the sale of crude oil: several providers, a world market and – unfortunately for the farmers – no OPEC”. Of course this sentence doesn’t seem very empathic. After all we like to look at the farmer as the one who produces our food, we like the romantic image surrounding that. And yet it is true. Proof is the current situation: “again prices are low, too low; and again financial support is demanded from Brussels”. On top of that, to satisfy the electoral constituencies, over-producing farmers receive money from Brussels. Only a limited amount of agro-undertakers has the potention and scale to become an extremely good ingredient supplier, because they can produce against sharp pricing (often at large volumes) and can combine this with good service (and sales).

Let me get straight to the point. Prices per unit being low only has one reason: over-production (= too much volume in the market). Farmers collectively produce simply a little too much. There just is too much, making prices low in a cyclical way and sometimes for a longer period of time even continuously. Most products – meaning most ingredients – of farmers are exchangeable on a European or global market. And where volume-offer is consequently too high (it probably is about a few percent) and the demand is reasonably stable (or sometimes a little lower, think of the Russian boycott), prices per unit of product are strongly reduced. Often even below the manufacturing cost. The farmer then is forced to eat into his assets or to accept a payment for labor lower than the minimum wages. Farming products (being ingredients) simply have a very nasty price-electricity. A little too much supply and prices plummet.

I can hear you think: “No, it’s the supermarkets that squeeze the farmers”. Well, let me enlighten you: that is only partly the case. It’s more a matter of there being NO relation than there being one. The supermarkets mutually rival and will calculate the lowest possible price for their customers. But their supplier rarely is directly the farmer. The suppliers of supermarkets are large central buying organizations (like Greenery), processors (like fresh-cut industry) and food producers (like Unilever or Hak). Most farmers and nurseries sell their products to these suppliers. And as long as they deliver an anonymous bulk-ingredient, the producers (being the farmers and nurseries) will also receive an anonymous (low) price. The intermediary especially looks for constant quality, low price, security of supply and service. When the offer is too large – the current situation – the farmers simply have bad luck.

Another way of thinking is that the supermarkets should ask higher prices from us, their customers, and that this raise in price can be paid to the farmers. The painful reality is that there is no relation between the consumer price in the supermarket, the purchase price of the supermarket and the farmer’s price. Even more so, when the farmer’s prices are low, the processor’s margin tends to rize, something the consumer doesn’t even notice. A good example of this phenomena is FrieslandCampina (FC). The price of raw milk had declined over the past 8 months (this was to be expected since the milk quota is abandoned and farmers are buying more cows and milk more liters per cow), but FC shows nice profits. Other reasons why the price of recourses can’t be correlated to consumer products are: carcase balance, seasonal influences (good or bad weather), sustainability of the agro-resource, the true cost price of processing, etc. etc. Each intervention through consumer prices therefor is pointless. Each political ‘solution’ through VAT or other taxes for food with the goal of getting a fair pride for the farmer is doomed to fail. There is no relation, making intervention nonsense. Supermarket representative Marc Jansen makes a good point on his food log.

In the meantime the financial problems with nurseries and stockbreeders (pigs, cows, chickens) are becoming unsustainable. Farmers quit on a massive scale, which is a very bad development. A strong agricultural sector is of the utmost importance to 1) environment, 2) landscape, 3) food sovereignty and 4) the rest of the economy. But what could be the solution for the farmer? More subsidy? No, I don’t think so, and certainly no production volume increasing measures. Maybe we should give the farmers a basic income? Not very realistic either.

In my opinion there are only three mindsets that can solve the problem of too low prices:

  1. Farmers start (again) to make specialties (think of Tasty Tom)
  2. Farmers start (again) to process their own product to consumer goods (and even sell under new brand names?)
  3. But above all: turn the volume knob. Produce less, collectively.

The key question is how to implement these three advices. Numbers 1 and 2 belong to good entrepreneurship. Maybe 5 to 20 percent of the farmers could or should do something in this direction. However, it needs money, expertise and a big investment, means only owned by few agro-entrepreneurs, and even less entrepreneurs dare to actually implement those means. Besides that, a large part of the initiated innovation projects fails. It’s part of the deal, and that risk should partly be carried by society. Granting innovation subsidy to the farmers for mindsets 1 and 2 could be an instrument. Now Brussel seems to have some tens of millions of Euro’s available. Of course only a drop in the ocean (especially when you relate it to the GMO means; almost 1 billion ‘evaporated’), I’m also pessimistic about the ROI on these tens of millions. Without professional help of food designers, marketers, supply chain experts this will never work (I believe a professional is only an expert when he can prove his experience with a track record). Preferably these externa professionals will share in the risk of the farmer.

But what is the solution? Unfortunately I think there should be a ‘system’ that turns the volume knob (= less production). The farmers’ collective will have to introduce this mechanism which takes the excess volume (when prices are too low) from the market. Now I’m not a fan of re-introducing government purchase schemes. Nor do I like a star quota system. A system in which the farmer’s price is being compensated is also outdated. In the past this has led to large overproductions. In none of the cases I see a role for our government. The sector is hurting themselves, so they should pick up the challenge. I expect a creative solution that will be implemented AND maintained AND paid by the sector itself. And the supermarkets are not ‘guilty’ to the situation (even though they make good use of the low prices, and I can’t blame them) and I don’t see a large role for them in creating solutions.

These kind of complex adaptive problems (CAS, also see cynefin model) should be tackled by multiple partial solutions. The framework can be found here: “Blueprint for grand design”. The big boys should fend for themselves, but will have to apply some extra environmental and animal care demands. The smaller entrepreneurs can be supported if they want to go “unique” (see 1 and 2). The entrepreneurs have to take the initiative.

Our government could play a role with:

  • Prevention of non-sustainable goods entering the EU. Battery cage chickens are prohibited, so import of those should also be prohibited.
  • Prevention of EU subsidy being used to implement more agricultural area or processing. This was the cause for the current problems.
  • Assist at constructing a ‘volume reducing system’ with the sector (LTO) in the lead of these projects, instead of government or ministry.
  • Bend subsidy into income support (basic salary?) and only for countryside maintenance (nature!)
  • Reduce the use of fertilizer by increasing its import fees, promoting the reuse of animal manure, and increasing the price of cattle feed shipped into the (Rotterdam) harbor from outside Europe.

Seeing the big picture, getting the system, understanding that there are only a lot of partial solutions. And partial solutions shouldn’t be naïve, turn down the volume knob, but do it directly. It’s so simple. Or is it time for a European food-OPEC?

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