This relationship between the independent producer and FAB companies — specifically the level of coordination — must change in the coming years to meet the demands of an increasingly competitive end-user/consumer market. FAB companies will spend billions of dollars to develop new germplasm, traits, genetics and other technologies, largely due to evolving market and consumer demands. This investment provides a benefit to all industry participants, including independent producers and the consumer. However, systems that allow companies to capture value beyond the first step in the production chain, the independent producer, must be developed in order to allow companies making these large investments to be protected.
One way to do this is through vertical coordination. In fact, vertical coordination may offer the best solution to this problem. This involves developing a complex network of relationships through all aspects of the production chain. For example, if a developer is working on seed traits for a specific use, such as canola oil with increased levels of Omega-9 or high-protein soybeans for feed, the network needs to be developed between the companies developing the genetics, seed companies, and independent producers on the production side, as well as grain dealers, processors and distributors on the other side of the production spectrum, to allow products to be successfully and efficiently brought to market.
The development of these dedicated systems is not an overnight process though, and necessarily requires a multiyear commitment from those involved. In the case of the above-mentioned high protein soybean, a well-developed system may require an independent producer to commit to deliver fixed quantities of grain to a feed mill during specified delivery periods over several years. However, to allow a producer to participate in this type of system, it would need to allow pricing flexibility, requiring the development of complex marketing agreements between the feed processor and the independent producer.
If the trait developer lacks the necessary germplasm appropriate for a particular region, the vertically coordinated system would also require a licensing agreement between the trait developer and seed companies. A complex agreement between the trait developer and the end processor may also be required to deliver a branded and quality-controlled product to the end user and to deliver value back to the trait developer.
The coordination continues further down the chain as well. To ensure quality of the finished product, the processor must have the ability to confirm that the producer is complying with the product program. The processor must also take steps to ensure that the product is properly marketed to the consumer at the point of sale. Therefore, delivering the finished tender product to the customer requires coordination between the grocer, the processor and the producer.
Whether involving crop production, animal agriculture or both in a complete system from farm to field to fork, vertical coordination agreements at each stage in the system must appropriately distribute benefits to the participants, provide for quality control and be robust in order to ensure performance. These systems require the development of relationships that comply with applicable laws and regulations at the same time achieving business and economic goals. Finally, the systems must recognize the role of the independent producer. This requires an understanding of production risks, market risk and price risk management strategies.
If the FAB industry is to benefit from advancements in technology and end-users’ willingness to pay for specialized products, its future must entail increased vertical coordination through the use of complex production agreements, commodity marketing agreements and licensing agreements.