The battle of agri commodities intensifies: “Farmers have to act now”

Seven scenarios for farmers to improve their position in the food chain

The limits of our natural resources are nearing. Higher food demand will have to be realised with less land expansion potential, less inputs (water, fertilisers, chemicals, etc.) and fewer emissions and waste. So we have to produce more with less. The Food and Agriculture Organization of the United Nations (FAO) estimates that only 10-15% of supply growth could come from land expansion. However, productivity gain has slowed down to 1.4% per year, but it needs to be at least 1.75% to feed the nine billion people expected to inhabit the planet by 2050. On the other hand, enough food to feed 2 billion people is currently wasted along all parts of the food chain. So the solution to feed the world in a sustainable manner lies in innovation and collaboration throughout the chain.

Bart IJntema, Senior VP F&A Development at Rabobank International: Without sufficient yield gains and without new arable land to come into production, supply has fallen behind the acceleration in demand, which continues to pressure global stock levels. While there will be seasonal swings in crop availability, supply will struggle to keep up demand, suggesting we have entered an era of scarcity, with higher and more volatile prices, and an intensifying battle for agri commodities.

Given the higher demands worldwide, farmers seem to be sitting on a goldmine. Unfortunately, the opposite is true. Farmers in general have not seen their returns increase in line with the price spikes. One reason for this is down to the dramatically increased input costs. As price takers, they tend to get squeezed in between highly concentrated input suppliers and off-takers. Farmers have to act now. But what are their options in the strategic continuum, between cost reduction and co-makership, to capture a bigger part of the value pie?

  1. Demonstrate rural entrepreneurship
    This challenge is not ‘just’ about margin inequality throughout the supply chain. On an overarching level, it is about supply chains becoming increasingly difficult to manage. This is due to growing unpredictability of price, security and the availability of supplies. An uncertain, fragile and uneven trading environment adds to the complexity. In its Winning Through the Supply Chain report, Rabobank argues that increased sharing of risk and reward is the way to resolve this. Justin Sherrard, the report’s author: ‘Many supply chains can be characterized as a tug-of-war between one end and the other. The answer is to move forward in dedicated supply chains based on the principles of using less, doing more to maximize value at each stage, managing resource flows and working together – cooperation, not isolation.’ Within that context, farmers can demonstrate rural entrepreneurship, engage in a dialogue with chain partners, focus on relation rather than pricing, aim for multi-year supply agreements that enable them to add more value, or improve efficiency. Doing this can help farmers win back an increased margin.
  2. Relationships are key
    Engaging in to a dialogue with chain partners is already being put into practice. For example, by Australian mixed farmer Lachlan Seears. During his travels as a Nuffield Scholar, Lachlan gained a greater understanding of the supply chain for the various agricultural commodities that he produces. Lachlan feels that “if you are able to better understand your supply chain from production through processing, all the way to consumption, you will have a greater appreciation and understanding of what is required and what the costs involved are for downstream chain partners.“ As a result Lachlan has “taken the approach to develop better relationships with the processors and marketers who are further along my supply chain.”

    To connect with the most downstream link in the chain - the end consumer - Lachlan has set up a Facebook page for his company: Boonderoo Pastoral Company.“I set up this page to promote and show processors and marketers some of the best practices that we adopted in the production of our commodities. And to help close the gap between the farmer in the country and the end consumer in the city, which is getting wider and wider. Children these days are not aware of, nor understand, how the food that they consume is produced. I think as famers we need to be proactive and vocal to show the end consumer what we do,” he explains.
  3. Maximizing freedom
    Cost efficiency by focusing on increasing scale and producing agricultural bulk goods. This strategy is especially relevant for large corporate farms in, for example, Australia and Brazil.
  4. Consolidate and concentrate
    Consolidation does not necessarily equal concentration but, either way, larger farmers or farmers that have joined forces, for example by means of a cooperative, can increase purchasing as well as bargaining power. They will have more resources to invest in productivity growth and increase profitability.
  5. Innovate
    Look for continuous improvement. Conduct ongoing reviews of your business and processes, reach out to peers and learn from their best practices, work with other players in the chain, keep tabs with the latest agricultural developments to innovate and increase productivity.
  6. Reconnect
    Over the past decades, end consumers have lost sight of the beauty of farming, and of the origins of the produce that’s on their tables every day. Look for ways to reconnect with them. Share your authentic story, demonstrate your craftsmanship, show your passion; the end consumer is sure to be receptive and you will help raise the agricultural sector’s profile along the way.
  7. Deal Direct
    An increasing number of food companies, food retailers and foodservice companies are looking to shorten supply chains and deal directly with the producer, to help ensure quality, safety and sustainability, and to build a story around authenticity. Farmers can benefit from this trend, and in the process secure improved supply agreements, such as longer durations or improved payment terms, that can provide a basis for improving efficiency and product innovation.

    IJntema: “Food scarcity and the new sourcing strategies that result from it, will create great momentum for farmers. But the gains will not come easy. Only true rural entrepreneurs will reap the benefits.”