To Stay In Business, Farmers Face Loss Of Independence

January 1, 1996

Let's say some of your customers got together and said, "Give us your best price. By the way, this us how we want the product to look when it is delivered. If you can do that, we'll guarantee to buy your product and give you a price you can live with. "what would you say?

You might say, "No, I have enough customers for my product. I'll produce for them and take my chances on the market price. I'll make my profits by keeping costs low, being more efficient and having a higher volume of production."

You might say, "OK, let's make a deal." There may be a little room for negotiating price and product specification - but not much. You trust the people and hope that the relationship will give you a stable price and dependable income.

You might say, 1'Yes, I represent a producer group that will give you what you are desire in the quality and quantities you like. Since you are asking for a premium product and we are reliable, we want a better price. You won't have to deal with a lot of producers - just the people who are connected to us and accept the standards you require."

Today the customer rules. They gain clout by banding together. That is the emerging reality.

Managed care in the health industry. Big blocks of customers are forming under the umbrella of large organizations and insurance companies. They are looking for health professionals who will accept their prices and the standards of care they impose.

If you are an independent health care provider, many of your patients will be diverted to a contract provider group. You have a choice. You can join the panel of approved providers if you accept their terms about price and managed care requirements. If you are in the group you are assured of a steady flow of referred patients. Or you can go it alone with part of your market disappearing.

Another recourse is to band with other health care professionals of varied specialties and negotiate your best deal. Managed care organizations like the simplicity of dealing with a reliable group of providers who offer a range of services and can deal with the numbers of clients they need to refer.

The hue and cry you hear are from the health care professionals who are adjusting to a loss of independence and this new way of doing business.

Agriculture producer trends. Mike Boehlje, professor of agricultural economics at Purdue University, thinks agriculture of the 21st century will be increasingly divided between two groups of producers.

Producers who adopt a manufacturing mentality. They will produce high volumes of undifferentiated commodities for the open market.

The key to success is being a competitive low cost producer. High tech applications and computer technologies help improve yields and lower input cost in crop and livestock production. Management success depends on large scale farming, application of cost saving technologies, and continued pressure to reduce cost. Farmers will retain their independence but at the expense of assuming price risk in increasingly competitive markets.

Producers who are horizontally and/or vertically integrated. They will provide a value-added specialty product for a specific customer.

Boehlje sees an upsurge in the production of specialty crops or products in contractual arrangements with a food processor. Farmers will band together m a horizontal fashion with other farmers to form cooperatives, marketing networks and alliances. They will market their specialty product with sufficient volume, quality and timing to meet processor and consumer needs.

The other form of integration will be vertical. Farmers will contract directly with the processor and produce a specialty product that meets predetermined requirements.

Farmers need to have skills in negotiating contracts. They also have to have sufficient position or power to negotiate an acceptable deal. Arrangements have to be "I win/you win" for contract relationships to last. Farmers will trade their independence for financial gain.

Manufacturers conserve time, energy, and effort by negotiating with fewer suppliers. Besides specifying quality, they want to identify the source of the raw materials and trace back any problems that may be related to food safety. The processor and the farmer are tuned in to consumer needs and are ready to make modifications as necessary.

The emphasis on integrating the farmer into the food production system will take away independence while giving the benefit of reducing price risk. Instead the risks are relational. Farmers access markets by being inside the loop. The continuity of the relationship is crucial. If your buyer closes or chooses to do business elsewhere you lose your market. Farming will be on a smaller scale and will be less cost sensitive. Farmers will use information technologies to keep on top of the innovation m their field and will network with other producers. Farming will be increasingly sensitive to consumer and retailer demands.

Can you make it outside the loop? Are you big enough to handle the price risk of the open marketplace? Do you have a specialty product? Are you linked with other producers and with a buyer?

The hue and cry you hear are Great Plains and Midwestern farmers who are adjusting to a loss of independence and this new way of doing business.

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	To Stay In Business, Farmers Face Loss Of Independence January 1, 1996 Let's say some of your customers got together and said, "Give us your best price. By the way, this us how we want the product to look when it is delivered. If you can do that, we'll guarantee to buy your product and give you a price you can live with. "what would you say? You might say, "No, I have enough customers for my product. I'll produce for them and take my chances on the market price. I'll make my profits by keeping costs low, being more efficient and having a higher volume of production." You might say, "OK, let's make a deal." There may be a little room for negotiating price and product specification - but not much. You trust the people and hope that the relationship will give you a stable price and dependable income. You might say, 1'Yes, I represent a producer group that will give you what you are desire in the quality and quantities you like. Since you are asking for a premium product and we are reliable, we want a better price. You won't have to deal with a lot of producers - just the people who are connected to us and accept the standards you require." Today the customer rules. They gain clout by banding together. That is the emerging reality. Managed care in the health industry. Big blocks of customers are forming under the umbrella of large organizations and insurance companies. They are looking for health professionals who will accept their prices and the standards of care they impose. If you are an independent health care provider, many of your patients will be diverted to a contract provider group. You have a choice. You can join the panel of approved providers if you accept their terms about price and managed care requirements. If you are in the group you are assured of a steady flow of referred patients. Or you can go it alone with part of your market disappearing. Another recourse is to band with other health care professionals of varied specialties and negotiate your best deal. Managed care organizations like the simplicity of dealing with a reliable group of providers who offer a range of services and can deal with the numbers of clients they need to refer. The hue and cry you hear are from the health care professionals who are adjusting to a loss of independence and this new way of doing business. Agriculture producer trends. Mike Boehlje, professor of agricultural economics at Purdue University, thinks agriculture of the 21st century will be increasingly divided between two groups of producers. Producers who adopt a manufacturing mentality. They will produce high volumes of undifferentiated commodities for the open market. The key to success is being a competitive low cost producer. High tech applications and computer technologies help improve yields and lower input cost in crop and livestock production. Management success depends on large scale farming, application of cost saving technologies, and continued pressure to reduce cost. Farmers will retain their independence but at the expense of assuming price risk in increasingly competitive markets. Producers who are horizontally and/or vertically integrated. They will provide a value-added specialty product for a specific customer. Boehlje sees an upsurge in the production of specialty crops or products in contractual arrangements with a food processor. Farmers will band together m a horizontal fashion with other farmers to form cooperatives, marketing networks and alliances. They will market their specialty product with sufficient volume, quality and timing to meet processor and consumer needs. The other form of integration will be vertical. Farmers will contract directly with the processor and produce a specialty product that meets predetermined requirements. Farmers need to have skills in negotiating contracts. They also have to have sufficient position or power to negotiate an acceptable deal. Arrangements have to be "I win/you win" for contract relationships to last. Farmers will trade their independence for financial gain. Manufacturers conserve time, energy, and effort by negotiating with fewer suppliers. Besides specifying quality, they want to identify the source of the raw materials and trace back any problems that may be related to food safety. The processor and the farmer are tuned in to consumer needs and are ready to make modifications as necessary. The emphasis on integrating the farmer into the food production system will take away independence while giving the benefit of reducing price risk. Instead the risks are relational. Farmers access markets by being inside the loop. The continuity of the relationship is crucial. If your buyer closes or chooses to do business elsewhere you lose your market. Farming will be on a smaller scale and will be less cost sensitive. Farmers will use information technologies to keep on top of the innovation m their field and will network with other producers. Farming will be increasingly sensitive to consumer and retailer demands. Can you make it outside the loop? Are you big enough to handle the price risk of the open marketplace? Do you have a specialty product? Are you linked with other producers and with a buyer? The hue and cry you hear are Great Plains and Midwestern farmers who are adjusting to a loss of independence and this new way of doing business.