EVOLVING STRUCTURE OF AGRICULTURE AND COLLECTIVE ACTION

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EVOLVING STRUCTURE OF AGRICULTURE AND COLLECTIVE
ACTION

• Steve Sonka
• Assistant Dean for Research Strategy
• Emeritus Chair for Soybean Industry Strategy
• University of Illinois at Urbana-Champaign

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Two Clashing Perspectives

• A business entity is successful when
• Its services and products provide sufficient net
  value to customers and
• Its profits provide a rate of return that exceeds
  the owners hurdle rate.
• In ag, our attention has tended to focus on
• Commodity Volume
• Collective efforts
• transform stuff from large numbers of farmers
  with similar interests
• into output for mass markets

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Two Clashing Perspectives

• A business entity is successful when
• Its services and products provide sufficient net
  value to customers and
• Its profits provide a rate of return that exceeds
  the owners hurdle rate.
• In ag, our attention has tended to focus on
• Commodity Volume
• Collective efforts
• transform stuff from large numbers of farmers
  with similar interests
• into output for mass markets

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Agenda

• Emphasize opportunity in segmentation
• Ag structure
• Heterogeneity
• Perspective
• An example of segmentations benefits
• Ownership
• Customer

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Yesterday Not That Long Ago
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Today Early in the 21st Century
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Yesterday Not That Long Ago

• Similar interests to neighbors
• Competitor sell inputs or buys output
• Non-farmers much better off
• Small economic units
• Unconnected to non-farm economy
• Success comes from working hard

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Some Dimensions of Being a Farmer
FarmersArent They All the Same?
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U.S. Farms by ARMS Typology 1998
61.8
28.8
7.5
2.0
Large Very Large Family Farms
Limited Resource, Retirement, Residential
Farming Occupation
Non-Family Farms
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Acreage Operated 1998
41.8
30.1
20.6
7.5
Large Very Large Family Farms
Limited Resource, Retirement, Residential
Farming Occupation
Non-Family Farms
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Acreage Owned Versus Rented
80.0
76.2
57.0
40.7
Limited Resource, Retirement, Residential
Farming Occupation
Large Very Large Family Farms
Non-Family Farms
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Employing SelectedManagement Practices
Limited Resource, Retirement, Residential
Low Sales High Sales Farming Occupation
Large Very Large Family Farms
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Cooperative Membership
Limited Resource, Retirement, Residential
Low Sales High Sales Farming Occupation
Large Very Large Family Farms
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Linkages

• Interests of majority of farmers differ from
  interests of farmers who produce majority of farm
  output

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Where Does the Farm Households Income Come From?
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Total Household Income Where Farming Subtracts
Limited Resource
Low Sales Farming Occupation
Retirement
Residential Lifestyle
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Total Household IncomeWhere Farming Adds
High Sales Farming Occupation
Large Family Farms
Very Large Family Farms
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Hours Worked On Off the FarmFamily Farm
Households
24.1
29.8
18.3
18.9
Low Sales High Sales Farming Occupation
Large Family Farms
Very Large Family Farms
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Linkages

• Interests of majority of farmers differ from
  interests of farmers who produce majority of farm
  output
• Off-farm work consumes time/attention is
  important economically across all farm categories

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Whos Well Off?
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Linkages

• Interests of majority of farmers differ from
  interests of farmers who produce majority of farm
  output
• Off-farm work consumes time/attention is
  important economically across all farm categories
• Farmers economically advantaged

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Farm Income Support Policies
Remember the independent family farmer
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Linkages

• Interests of majority of farmers differ from
  interests of farmers who produce majority of farm
  output
• Off-farm work consumes time/attention is
  important economically across all farm categories
• Farmers economically advantaged
• Farm the government, not the market

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The Farmers NeighborFriend or Foe?
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 Tenure Dynamics in the Midwest
Full owner Part owner Full tenant
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Linkages

• Interests of majority of farmers differ from
  interests of farmers who produce majority of farm
  output
• Off-farm work consumes time/attention is
  important economically across all farm categories
• Farmers economically advantaged
• Farm the government, not the market
• Competition for access to land changes
  relationship dynamics

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Assume a Commodity Market
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Share of Hog Production-By Type of Vertical
Coordination 1970-1999
Now Above 80
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Linkages

• Interests of majority of farmers differ from
  interests of farmers who produce majority of farm
  output
• Off-farm work consumes time/attention is
  important economically across all farm categories
• Farmers economically advantaged
• Farm the government, not the market
• Competition for access to land changes dynamics
• Open market sales of commodity output declining
  as a share of total ag output

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Segmentation
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New Zealand MerinoCreating a Silk PurseFrom a
Sows Ear
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World Wool Production and Price 1970-2000
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Old and New Substitutes Growing
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New Zealand Wool Board Responded

• Generic promotion
• Trademarks with no discipline

Just not effectively, Especially for Merino !!!
Merino has superior quality
Typically used to raise NZs average quality
for low value markets
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A Silk Purse From a Sows Ear
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• In 1993 two Central Otago farmers
• John Perriam
• Robert Jopp
• shared a vision
• The development of a farmer owned organization
  that would differentiate NZ merino wool from the
  crowds.

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From Vision to Reality.
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Offers Brand Partners
Unique Marketing Propositions.
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• These may include Intel inside co-Branding
  Relationship with some Partners

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• And less obvious exclusive arrangements with
  others.

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Financial Performance 2002 FY

• Turnover NZD 85 mil
• NZM auctioned wool
• 12 price premium compared to competition
• 82 return on Investment

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Summary Points

• Collective action efforts
• strive to enhance farm income but underlying
  context has changed and is changing
• Key structural changes have eroded the
  commonality of the farm identity
• Future success of collective action efforts
  requires
• Mentality shift from commodity volume to value
  and required rates of return
• Creative use of segmentation
• To link needs of customer groups and interests of
  producer groups
• That employs innovative organizational
  arrangements