A new brand of agriculture: farmer-owned brands reward innovation

Choices: The Magazine of Food, Farm and Resource Issues, Fall, 2002 by Dermot J. Hayes, Sergio H. Lence

Commodity agriculture, as currently practiced in the mid-western United States, is an extremely efficient way of organizing production and distribution. It allows for inexpensive production and bulk transfers of huge quantities of meat, grain, and other agricultural products. As a consequence, it has brought enormous savings to U.S. and international consumers. This system has evolved in accordance with market forces that we expect will survive for decades.

There are aspects of the commodity system, however, that are not desirable. For example, the commingling that occurs to take advantage of bulk handling means that consumers cannot send signals to producers. Consumers might desire food products that are different from the commodity standard, and they might be willing to pay a premium, but the producer does not get this signal.

In addition, competitive pressures mean that farm operations must grow larger to reduce unit costs of production. Governments throughout the world have attempted to slow growth in farm size in order to ease the transition for those who are forced out of farming, and to prop up rural communities. These government "protections" distort markets and sometimes lead to international tension, as each country defends its own interventions.

Farm groups have attempted to address these issues in two ways: by developing alternative uses (such as ethanol plants), or by creating differentiated niche products (such as food-grade soybeans grown exclusively for tofu). However, when these efforts are successful, they are quickly imitated, and competition drives profit margins lower.

A third possible solution--farmer owned brands--has recently begun to emerge. This solution requires cooperation between producers and government, but it also relies upon market forces. In essence, the solution allows farmers to own their own brands and to control the production of branded quantities, much as already occurs in other sectors of the economy. In the European Union, branded commodities are described as having either a "guarantee of origin" or a "guarantee of production process." (in the U.S., the description will include a reference to a federal marketing order.) Neither of these phrases captures the essence of the concept, so we refer to them as "farmer-owned brands."

The Economics of Farmer-Owned Brands

The key criteria to establish successfully a differentiated agricultural product are summarized in Box 1. Some consumers are willing to pay premium prices for differentiated products. These premiums can occasionally result in niche markets, such as those that exist for organic products and local farmers' markets. Dedicated consumers are essential for the success of a farmer-owned brand. But producers in traditional niche markets do not attempt to control supply: that is, they do not prevent imitation. Therefore, profits for producers of organic and local products are likely to follow the pattern found in commodity product marketing. Successful branding requires producer control over the quantity supplied, and this is the key difference between farmer-owned brands and organic products or farmers' markets.

In order to control supply without violating federal price-fixing rules, farmer-owned brands must be based on some fixed and identifiable attribute. For example, a particular brand might specify that the product can only come from a certain area (Vidalia onions are a prominent example--see below). Alternatively, supply can be controlled by limiting membership in the producer group to a relatively small number of high-quality producers.

A third way would be to impose strict (for example, environmentally friendly) production and/or quality standards, possibly allowing for some flexibility over time to accommodate changes in market circumstances. This model resembles that used by the Boston Brewing Company, marketer of the Samuel Adams brand craft beers. Boston Brewing contracts production of Sam Adams to breweries around the country, under exacting standards.

A fourth way is to require the farmer-owned brand to use some ingredient or process that can be controlled by the producer group, either through intellectual property rights or through trade secrets.

A successful farmer owned brand will become a temptation for imitators from outside the original group. Similarly, attempts by members of the group could subvert the group's intent by expanding their individual outputs. If these pressures result in an expansion of supply, the brand falls.

The most obvious way to restrict this supply expansion is to use regulations to protect the property rights of those who own the brand. These regulations might be the same as those used to protect branded products in other sectors, with the crucial exception that the regulation must be strong enough to restrict additional production from within the group--an issue that is not faced by corporate brand owners. The ability to restrict production brings relief from the boom-bust price cycles associated with commodity markets.