1. A project funded by the W.K. Kellogg Foundation and
the USDA’s Sustainable Agriculture Research and Education Program

2. Task Force Leaders Convening Chair: Administrative Chair:
Fred Kirschenmann,
philosopher, Leopold Center for Sustainable
Agriculture, Iowa State University
Administrative Chair:
Steve Stevenson,
sociologist, Center for Integrated Agricultural Systems, University of Wisconsin-Madison
Agriculture of the Middle (AOTM) web site:
Slide # 2.  While Kirschenmann and Stevenson served as convening and administrative chairs, it is fair to say that all task force members were "leaders" in this effort.  The task force consisted of 24 regular members, (farmers, researchers, extension, NGO leaders, industry leaders, and government agency leaders) plus eight resource people who came to at least one meeting.

3. The bifurcation of the American food system
Small-scale enterprises selling to direct markets or
Mega-farms selling commodities to huge, consolidated food and fiber firms
Resulting in the disappearance of the “ag of the middle”—usually family-operated farms
Slide # 3.  Our current market structure and food policies are moving us rapidly toward a food and agriculture system that is thriving at the two ends of the system---mostly small, direct markets at one end and very large, increasingly vertically integrated markets at the other end.  Direct markets (farmers markets, community supported [subscription] agriculture, roadside stands, internet sales, home deliveries, etc.) generally produce a range of products that a small, but rapidly growing, number of food customers want.  Since farmers supplying these markets not only must grow, but also prepare, process, and deliver their products, it places a severe restriction on the amount of product these farmer can individually bring into the market.  Vertically integrated markets increasingly are driven by very large, consolidated retail chains (like Wal-Mart) and employ a mass production food system that features very little differentiation.  These chains compete on the basis of mass production of undifferentiated commodities at the lowest possible prices therefore they only want to buy raw materials produced at the lowest possible prices and prefer to buy from the largest producers in order to reduce their transaction costs.  This "bifurcation" of the food system puts mid-sized, independent "family" farmers at a competitive disadvantage.

4. The declining middle
Slide # 4. Iowa, in the heartland of American agriculture, serves as a compelling example of the speed at which the "middle" is now disappearing.  According to the 2002 USDA Agriculture Census data, typical "family" farms, those with gross sales of between $50,000 and $499,999, have been disappearing most rapidly---a 22.5 percent decline in just five years!

5. What do we lose if the midsize farms disappear?
The ability to produce sufficient volumes of foods with highly specialized attributes
Many conservation and environmental advantages (air, water, soil, wildlife habitat)
Taxes will increase because residential areas require more public services than farmland
Face of rural America altered to contain very small farms surrounding urban areas and mega-farms occupying rural areas
Slide # 5.  This is not just about "saving" the family farm.  It is about the social, economic, and environmental costs to American society.  With the loss of each family farm, a rural community loses approximately $720,000 in related economic activity.  Ecologists now affirm that the only way we can manage farmland in an ecologically sound manner is by having the farmer living on his/her land long enough and intimately enough to have learned how to manage it properly.  With the loss of ecological land health we see the loss of soil quality, wildlife, and recreational areas. And with the loss of rural populations the loss of public services---education, health care, transportation---inevitably follow.

6. “Ag of the middle” farms can thrive!
Niches for highly differentiated products
Michael Porter -- Two ways to be competitive:
being the lowest cost supplier of an undifferentiated commodity or
providing the market with a unique and superior value in terms of product quality, special features or after-sales service
“Ag of the middle” farmers can be competitive using a functional value chain structure to connect these farmers to the markets.
Slide # 6. During the past century the agriculture establishment has taken the curious position that the only way to be competitive in a global economy is to be the lowest cost supplier of an undifferentiated commodity.  Michael Porter, renowned market economist at the Harvard University Business School, takes strong exception to this hypothesis.  A second way to be competitive is to be the supplier of a product that features "value" instead of lowest cost.  The "middle" farms are uniquely poised to compete in this second arena---they are small enough and flexible enough to transition from the first way to the second way of doing business.  But to participate profitably in this second way to be competitive, new business models need to be developed, including a value chain structure.

7. Food Service Distributor
What is a value chain?
A value chain is a long-term network of partnering businesses working together to maximize value for the partners and for the end customers of a particular product.
Market
Input Suppliers
Farmers
Packer (Primal cuts)
Fabrication
(Portion Cuts)
Food Service Distributor
DELIVERY
DELIVERY
DELIVERY
Slide # 7. In a traditional "supply chain," the farmer simply supplies raw material into the chain and cannot influence the price which he/she gets paid for the commodity he/she produces.  Each party in the supply chain is in competition with every other party, seeking to obtain the largest possible margin of profit at the expense of the other parties.  The most consolidated, capitalized party inevitably wins. In a "value chain," all parties in the chain work together as "partners" to bring the product of unique value into the market place.  For food production, increasingly, part of the "value" of the product is in the "food story" that accompanies the product.  Making sure that farmers are fairly rewarded for their labor is one of the ways to add value to the product.  Fair Trade Coffee is one example of this sort of value chain at work.
Market
Vet Services
Market
Value chain – farmer as partner
Supply chain – farmer as input supplier

8. Value chains How do farmers participate?
Farmer does the marketing (direct)
Farmer relies on other entity to do the marketing (co-ops, networks)
Farmer influences or has ownership in other parts of the chain (processing)
Midsize farmers more likely to participate in co-op or networks so they do not have to market their product
Slide # 8.  There are at least three ways that farmers can participate in a value chain.  Most obvious is direct marketing where the farmer decides what "value" to add to his/her product, chooses what price to charge, and retains all of the value.  A second traditional approach has been for farmers to participate in a marketing network, like a co-op, in order to be able to add value to their production through collective pricing.  A third way, what we might call a "new generation" value chain, is to partner with the other players in the chain---processors, distributors and customers---to bring a product of special quality into the marketplace, possessing a unique food story, and establishing a trusting relationship with the food customer.  In this new model it is in everyone's interest to compensate the farmer adequately, since it is the only way to retain the "value" of the product.  If farmers are not compensated adequately for their part in the value chain, the food story loses its value, the quality of the product is likely to be compromised, and the trusting relationship begins to break down.

9. Key characteristics of value chains
Link economies of scale with differentiated products
Combine cooperation with competition
Promote high levels of performance and trust
Require shared vision, information, and decision-making
Slide # 9. These are a few of the key characteristics that have to be built into value chains to make them successful.

10. Value chain economics based on three components
Partner rewards based on agreed upon formulas
Target or cost-based pricing
Contracts for long-term partnerships
Three-fold value built into product marketed through the chain—quality of the product, food story, trusting relationship
Slide # 10. The success of value chains is based on cooperation among all partners to meet shared economic goals Such partnerships must be sealed with agreed-upon formulas, transparent pricing, and reliable contracts.  Success also depends on adding the kind of "values" that target food customers want to buy.  Today's differentiated food market customers want "quality"---good taste, nutritious, etc.; a good food story---produced by a family farm, animals treated properly, good environmental stewardship, farmers fairly compensated, etc., and the kind of transparency that enables customers to "trust" the relationship.

11. Challenges for mid-tier value chains
Strategies for product differentiation and pricing
Achieving sufficient volume and quality
Adequate capitalization and competent management
Consistent standards and certification mechanisms
Slide # 11. Like all business ventures, value chains have their own unique challenges.  These challenges must be faced head on, proper feasibility studies conducted and viable business plans developed.  And customers must be assured that they are getting what the value chain promises them through a transparent set of standards and third-party certification.

12. What are we learning from existing regional value chain efforts?
Producer groups involved in highly differentiated markets benefit from engagement in working groups that facilitate comprehensive assistance to address their challenges;
Land grant universities can cooperate with NGO, agency, and business partners to establish and operate value chain working groups that address technical, production, policy, and market challenges;
Value chain relationships can be designed to reward partners fairly based on contribution and risk;
Economic, ecological, and social benefits can be successfully incorporated into the planning process for value chains;
Slide # To date at least seven lessons have been learned from entrepreneurs and researchers who have developed and studied value chains.

13. What are we learning from existing regional value chain efforts?
Farmers will not increase production, to supply the growing demand for highly differentiated and sustainably produced foods, unless there are appropriate incentives that provide adequate premiums and structure so the risks of increasing supply are shared;
Mutual interest in the success of other partners within a value chain creates greater opportunity for success among all partners;
Value of the product can be increased with a food story—farmers and farm workers fairly compensated, animals treated well, good environmental stewardship, etc.
Slide # To date at least seven lessons have been learned from entrepreneurs and researchers who have developed and studied value chains.

14. Food Industry Breakdown Historical Foodservice vs. Retail Spending
(In Billions)
Foodservice $438
Retail $446
Total Food Industry Market $884
Historical Foodservice vs. Retail Spending
% of each food dollar to Retail
% of each food dollar to Foodservice
50.4%
Slide # 14. One of the great opportunities in the market today is the tremendous growth in the food service industry---restaurants, health care facilities, schools, etc. Increasingly, this market is demanding highly differentiated foods---grass-fed, antibiotic-free, humanely raised, organic, place-based, produced by local family farmers, etc. This growing market provides us with a historic opportunity to link the farmers of the "middle" into marketing networks that can supply these unique products and link those farmer market networks to food industry distribution networks and to the growing number of retail chains that want to feature a separate line of these differentiated food products.
49.6%
Source: Technomic

15. A Three-Phase National Initiative
Renewing an Agriculture-of-the-Middle (AOTM):
A Three-Phase National Initiative
An initial task force phase (completed summer 2003) in which strategic frameworks and principles were formulated;
A developmental phase (fall ) in which capacity is developed for a three-fold approach involving new business and marketing strategies, public policy changes, and research and education support; and
An operational phase, in which major marketing, policy, and research/education activities are institutionalized within existing agri-food system industries and organizations.
Slide # 15.  The Agriculture of the Middle project has now completed its first phase---the National Task Force has developed a strategic framework and set of principles which can guide our work.  It has formed a National Coordinating Committee and is currently seeking funding to implement phase two.  It is the intention of the Project to institutionalize this third segment of the food system into existing agri-food system industries, farms and organizations within the next three to five years.

16. Strategic framework for AOTM
New business & marketing strategies
Public policy changes
Research and education support
Slide # 16. The strategic framework developed by the national AOTM Task Force has three components. First, new business and marketing strategies will be developed in cooperation with the food industry, land grant universities, farm organizations and other interested organizations.  We will seek to establish three or four "models" of such functioning market networks in different regions of the country and will provide information and tools that can help local farmer/industry marketing networks to develop. We also are cooperating with two certification agencies to develop an efficient, all- electronic, third-party certification system and appropriate standards for AOTM value chains. With help from land grant university personnel and appropriate non-profit organizations, the project also will explore policy changes and promote research and education activities that can assist farmers interested in making the transition to become part of these value chains.

17. Activities - AOTM developmental phase
Organizational Structure
Develop a clear statement of vision, rationale, and goals
Create an organizational and administrative framework to support the Phase II work
Slide # 17, 18, & 19.  Specific activities that the AOTM Coordinating Committee will seek to implement during phase two of our work.  We anticipate that phase two of our work can be completed in 18 to 24 months, depending on the success of our fundraising efforts.

18. Activities - AOTM developmental phase
Policy and Research
Collaborate with other organizations and agencies to enact meaningful public policy changes
Develop and engage the initiative’s research and education capacity
Slide # 17, 18, & 19.  Specific activities that the AOTM Coordinating Committee will seek to implement during phase two of our work.  We anticipate that phase two of our work can be completed in 18 to 24 months, depending on the success of our fundraising efforts.

19. Activities --AOTM developmental phase
Business and Marketing Infrastructure
Develop standards and a certification system
Develop value chain partnerships
Develop a tool kit of resources
Develop corporate sponsorship of the AOTM food system
Slide # 17, 18, & 19.  Specific activities that the AOTM Coordinating Committee will seek to implement during phase two of our work.  We anticipate that phase two of our work can be completed in 18 to 24 months, depending on the success of our fundraising efforts.

20. For more information on AOM contact:
Steve Stevenson – CIAS or
Fred Kirschenmann – Leopold Center
Or visit the web site:
Slide # 20.  Contact information. Please feel free to contact us if you want additional information. We may be able to put you in touch with AOTM leaders who are already at work in your region of the country.