Definition  Commodity – Undifferentiated – Perfectly competitive markets  Products – Differentiated – Monopoly - Workable competition – Niche Market, branded, labeled, etc

Motivation  Commodity market – Price takers – Cost driven – Long-run P=minimum ATC  Product markets – Price makers – Costs not as important – Potential for sustained higher profit margins

Commodity system  Extremely efficient  Challenges – Co-mingling from many sources – Consumers signals not transmitted – Little incentive to improve because benefits not passed through to producer – Expand to capture economies of size

Product system  The challenger  How to differentiate?  Managed supply chain – Allows traceback to producer – Restricts production – Focus on quality

Procedures  Why is the product different? – How it is produced – Where it is produced – What is produced – What it includes – What it doesn’t include  Develop marketing around the difference

Procedures  Limit production and access to control supply – Can’t look like price fixing to regulators – Geographical restrictions – Trade secret – Emphasis on quality

Procedures  Traceability – Recordkeeping systems used primarily to keep foods with different attributes separate – Segregation systems – Identity preserved

Traceability  Segregation – Separates batches – Typically does not entail high level of precision nor traceability – Example » White corn

Traceability  Identity Preserved – Much stricter segregation – Does entail high level of precision and traceability to guarantee certain traits are maintained throughout the supply chain – Example » Tofu-quality soybeans

Traceability  Private sector motivation – Differentiate and market food s with undetectable or subtle quality attributes – Facilitate traceback for food safety – Improve supply chain management

Differentiate and market foods with undetectable or subtle quality attributes  Credence attributes: characteristics that consumers cannot discern even after the consumption of the product. – Content attributes affect physical properties of product (nutrient value) – Process attributes doesn’t affect product, but refers to how it is produced or processed (organic, free range, shade-grown, fair-trade)

Facilitate traceback for food safety  Quickly isolate food safety and quality problems  Avoid problems associated with the label or brand  No longer commodity

Improve supply chain management  Part of information system – Bar codes in stores – Identify fast sellers or problems – Pass back information to suppliers – Improve product with information

Motives for Government mandated tracability  Enhance food safety  Address consumer information about safety and quality  Protect consumers from fraud and producers from unfair competition

Food safety and quality  Generally rely on performance standard rather than process standard  Commodities use minimum performance standards

Credence challenges  Establish market creditability – Many close substitutes????  Provide objective validation of quality claims – Third party verification  USDA comment period on claims

Third party verification  Good Housekeeping Institute  American National Standards Institute  ISO  Process Verification  Private label systems

ISO, Greek for Equal  Private sector system  International standard for quality management –Say what you do –Do what you say –Prove it with records and audits –Improve it continually

USDA Process Verified  Based on ISO  Suppliers are able to have marketing claims such as breed, feeding practices, or other raising and processing claims verified by the USDA and marketed as "USDA Process Verified.

USDA Process Verified  Excel Corporation –Verified Pork for Strategic Export Program  Farmland Food  PM Beef Group LLC  Pederson's Natural Farms  Pro Pork Associates  Red Angus Feeder Calf Certification Program

Organic foods and farming  USDA organic certification program started April 21, 2001  Farms must be certified as organic by an approved certifier

Organic Food and Farming  $9 billion total U. S. industry sales in 2001  Annual growth rate exceeding 20%  2.3 million organic acres in U. S. (2001)  500 organic farm in Iowa  150,000 organic acres

Organic Requirements  No prohibited substances (fertilizers /pesticides) for three years  No synthetic hormones or antibiotics  A border of 25 ft. between organic and conventional production  No GMO seeds or plants  Crop rotations (no cropping of same plant every year on same section of land)

Organic Labels  “ 100% Organic”: 100% organically certified ingredients; must show certification agency  “ Organic”: At least 95% organic; no prohibited substances  “ Made with organic ingredients”: at least 70% organic ingredients; no prohibited substances; no organic seal.  Include “organic” in ingredient list.

Farmer-Owned Brands Hayes and Lence  Brunello di Montalcino – Small region with vineyards – Production is control – Minimum price for wine is set – Brand is protected – Rules are enforced – Eligible land sells for six times neighboring farm

Farmer-Owned Brands Hayes and Lence  Parma Ham – Restricts area where ham can be cured – Claim unique climate and winds – Restricts breeds and regions where hogs can be produced – Italian hog prices averaged $7.44 more than German hogs

Farmer-Owned Brands Hayes and Lence  Vidalia Onions – Selected region in south Georgia – Used existing state law to restrict area – State-owned trademark – Premiums of $.30-$.34 per pound – First spring sales are 30-50% higher

Niman Ranch  Welfare friendly pork – Pasture raised or deep bedded – Natural production process – head a week – High end markets and restaurants – On-line store: 2 11/2” chops $21.25 – Farmers have some price protection and premiums

Country of Origin Labeling  Subtitle on 2002 Farm Bill  Voluntary September 30, 2002  Mandatory September  Was delayed until Sept 30, 2006

Who and what is covered  Retailer shall inform consumers at the final point of sale of the country of origin of covered commodities. – Muscle cuts of beef, veal, lamb, and pork – Ground beef, lamb, and pork – Farm-raised fish and shellfish; wild fish and shellfish – Perishable agricultural commodities (fresh and frozen fruits and vegetables); and peanuts

What qualifies for USA  To carry the USA label it must be exclusively born, raised, and slaughtered in the United States – Born in country X, raised and slaughtered in country Y. – Born and raised in country X and slaughtered in country Y  Exemption for food service  The Secretary shall not require a mandatory identification system

Didn ’ t create “ unknown origin ” label  Meat products without country of origin documentation cannot be marketed through retail outlets.  These products will likely be channeled to food service, additional processing, or some other exempt outlet.

What is required (USDA)  Retailers must ensure verifiable audit trail – Suppliers in the production chain must maintain the necessary records, keep readily accessible, and remain on file for two years. – The guidelines do not specifically any acceptable record keeping standard. – When mandatory the first point of enforcement will be at the retail level

Enforcement at retailer level  USDA does not anticipate taking any enforcement action during the two-year voluntary phase.  USDA does not expect to conduct random audits on the wholesale or farm level.  Any audits at these segments of the production chain would be a result of complaints originating at the retail level

Commodity v. Product  Commodity – Always a market – Focus on cost of production and price risk management – Minimum standard for safety and quality

Commodity v. Product  Product – Must develop market and limit supply – Focus on quality and cost control – Advertise, promote, differentiate – Always work to improve – Safety and reputation risk to manage