Does On-Farm Quality Assurance Pay? A Cost-Benefit Analysis of the Grainsafe Program

Journal of Agricultural and Applied Economics, Dec 2007 by Karaca, Umit, Alexander, Corinne, Maier, Dirk

Since the introduction of genetically modified (GM) crops, the commodity grain system has been under pressure to segregate GM and non-GM crops. Starting at the level of the grain handler, members of the grain supply chain have successfully used quality assurance and identity preservation programs to segregate non GM crops. Producers delivering high-value, identity-preserved crops have become interested in implementing these quality management systems at the farm level. We conduct a cost-benefit analysis that shows that quality assurance program may be profitable for producers, depending on their farm size and equipment management strategy.

Key Words: @Risk, cost-benefit analysis, identity preservation, on-farm quality assurance

JEL Classifications: Q12, Q16

Trade of agricultural products has been based on the commodity system. With the introduction of genetically modified (GM) crops in 1996, the grain handling system has been under pressure to keep GM crops segregated from non-GM crops (Maier; Philhps). Currently, Europe and Japan have restrictions on the importation of GM crops, and several major U.S. food companies have discontinued the use of GM ingredients in their products (EUREP). The U.S. grain handling system learned that its efforts to segregate GM and non-GM crops were not successful when the food supply chain was found to be contaminated with GM corn not approved for human consumption (e.g., StarLink). Wrrile StarLink was supposed to be handled by an identity preservation (IP) program to segregate it from the food market, there was a failure by the industry to follow the required steps (Environmental Protection Agency [EPA]). In response to the StarLink contamination and general concerns about food quality, many companies have introduced programs to assure the quality of the crop and preserve its identity in order to guarantee the segregation of non-GM crops destined for Europe, Japan, or food companies (Hobbs, Kerr, and PhiUips,). QuaUty assurance (QA) and identity preservation (IP) programs, if they had been implemented diligently, would likely have prevented the StarLink contamination of the food supply chain, which was estimated to cost the supply chain $1 billion (EPA).

While much of the food-grade corn supply chain has implemented QA and IP programs, most of these programs start at the level of the first handler (Anderson; Hurburgh 2004; Stevenson; Voigt). For instance, National Starch has implemented the TrueTrace(TM) program, and Cargill has implemented the Innovasure(TM) program, to name just a few of the QA and IP programs for food-grade corn. Currently, producers are becoming interested in using these programs to gain an advantage in delivering value-added grains. However, any QA or IP program, like the Grainsafe OnFarm Quality Assurance Program that guarantees quality and segregation, will require additional handling efforts and will thus create additional costs. In addition to the direct costs, QA or IP programs may add other indirect costs, such as yield penalties due to planting or harvest delays introduced by the additional time and labor required to clean equipment. The main objectives of this paper were 1) to develop a cost analysis model for the production of white corn with and without the Grainsafe program for two different equipment management strategies and three farm sizes, 2) to quantify the additional costs associated with the Grainsafe program and compare them with the costs of conventional white corn production, and 3) to quantify the producer benefits associated with the Grainsafe program.

The Grainsafe Program

Grainsafe, developed by the Purdue University Post-Harvest Education and Research Center, is a quality assurance program integrated with good grain production practices and good grain handling practices. The Grainsafe program adds additional steps to conventional grain production practices and requires producers to keep records of their farming practices in a prearranged format to ensure high end-use quality and to preserve the identity of the crop leaving the farm. These requirements will create additional costs: labor costs due to training, record keeping and management, field sampling and strict cleanout practices required by the program, and the costs for laboratory testing. Operations planning and equipment management strategies have additional importance in the adoption of QA and IP programs like Grainsafe, as they prevent contamination and reduce the labor costs. The first in field-first out of field, also called first-in first-out (FIFO), strategy requires the introduction of the IP grain into the production system before commodity grains (Nielsen and Maier). In other words, IP grains should be planted, harvested, dried, handled, and shipped before commodity grains, when all equipment and facilities of the system were clean at the start of the season. The FIFO equipment management strategy prevents the carryover of commodity grain and avoids inseason clean-out (ISCO) of equipment and facilities.