Adding Value to Commodity Markets

NON-TECHNICAL SUMMARY: Over the last five years, both advances in biotechnology and the development of the Biofuels market have opened up new opportunities for farmers to plant crops that customers view as either higher value (for example, low linolenic soybeans, nutriceuticals and potentially corn traits designed for ethanol production) or lower value (examples include genetically modified organisms, dry distillers grain and soluble). In addition, farmers are being asked to provide more information about their products for a range of reasons: food safety as highlighted by recent food scares and the spinach case in particular, consumer preferences related to organic foods and non-GMO foods in the United States and in export markets, to name a few. Farmers and agribusinesses may benefit from the opportunities provided by changing customer demand, the new biofuels market and biotechnological advances, but this benefit depends on whether the buyer's valuation of the quality enhancements is larger than the cost to supply them. The proposed research projects on stored product protection, and organic dairy are designed to meet information and marketing needs of farmers and agribusiness managers. In a value-added supply chain, the additional returns accrue to the owner of the least elastically-supplied input, which is typically the processor. Thus, the farmer benefits minimally from producing inputs to value-added products. By understanding the process and product attributes that the processor values, this research will contribute to understanding the farmers opportunity to add value to the supply chain that cannot be extracted by the processor. Furthermore, the current relationship between processors and farmers is dominated by contracts. This relationship favors the processor since the processor writes the contract and offers it to the farmer on a take it or leave it basis. The farmers ability to benefit depends on their ability to evaluate whether the contract offers benefits to them relative to their other alternatives. With the growth in the ethanol industry, there has been an increase in the number of buyers which may shift some bargaining power to the producer, but it remains to be seen how a value-added corn trait ethanol industry or switchgrass industry will develop.

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APPROACH: Over the past five years, this project has focused on the availability of value-added products and the development of niche markets in Indiana. Because quality matters for value-added crops, this project was conducted in collaboration with Dr. Dirk Maier in Agricultural and Biological Engineering. The goal was to evaluate the tools farmers can use to improve the quality of their grain that would result in the ability to market their grain at a higher price. One completed research project in this area is a cost-benefit analysis of Grainsafe, an on-farm quality assurance process. Over the past five years, this project has examined farmers decisions to adopt genetically modified (GM) crops. The decision to plant GM crops affects the farmers marketing options because some buyers such as Japan and the EU prohibit or restrict the importation of GM crops. This research is based on a survey of Indiana farmers examining their planting intentions for Bt corn rootworm, a relatively new GM crop, and on focus groups with Indiana farmers eliciting their perceptions of insect resistance management plans. The first paper demonstrates that marketing concerns dominate the farmers adoption decision because this technology is not approved for sale in the European Union. A second paper describes farmers perceptions of insect resistance management plans including a potential fifth option where the refuge seed is blended with the transgenic seed. Over the next five years, this project will continue to address questions related to value-added markets such as organic agriculture, genetically modified crops, ethanol, bio-diesel, and other process and output traits. In order to answer these questions, this project will employ the quantitative tools that are best suited to answering each question including math programming, econometrics and survey techniques. In the area of grain quality, over the next five years this project will focus on evaluating the costs and benefits associated with integrated pest management for food-grade corn in on-farm storage. One major challenge in food-grade corn markets is maintaining a year-round supply of high quality corn because insects and molds can severely damage corn during the summer months. In order to enable farmers to improve the quality of their stored grains, a dynamic programming model is being used to evaluate the tools available to farmers to protect food-grade corn in on-farm storage. To the best of our knowledge, this is the most comprehensive research conducted in the U.S. on integrated pest management in stored food-grade corn. An organic dairy study is an example of a value-added product with process traits. This project will analyze the 2005 Agricultural and Resource Management Survey of dairy operations to compare the production practices and marketing practices of organic and conventional dairy operations. These results will be very useful to farmers in both sectors, especially those farmers who are considering transitioning to organic production.<P>PROGRESS: 2006/10 TO 2007/09 <BR>
OUTPUTS: During the last year this project has focused on the impact of the growth of the biofuels sector on commodity and value-added agriculture. One output was a four-week statewide commodity marketing educational program to over 400 producers at 27 locations around the state of Indiana via IP video during the winter of 2007. <BR>PARTICIPANTS: Dr. Chris Hurt <BR>TARGET AUDIENCES: Grain farmers
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IMPACT: 2006/10 TO 2007/09<BR>
This grain marketing course had direct impacts on attitudes and modified marketing behavior of participants. Over 90 percent of participants said the workshop increased their comfort level in using grain marketing tools covered in the program. More importantly, the workshop had an impact on producers' future grain marketing plans. When asked if they would change the way they market grain as a result of the program, over 30 percent of the participants said they would definitely change and an additional 64 percent of the participants said they may change the way they market their grain.

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PROGRESS: 2005/10/01 TO 2006/09/30<BR>
The production and marketing differences between organic and conventional dairies are being analyzed. This project will use USDA ARMS data with the goal of understanding the similarities and differences between conventional and organic dairies. This project will use production frontier analysis to identify the efficient frontier for all dairies and then test whether organic dairies are as efficient as conventional dairies. Organic dairies and conventional dairies that are considering transitioning to organic production will be able to use this information to make more informed production and marketing decisions. Integrated pest management principles are being used to evaluate stored product protection practices for food-grade corn. The protection of food-grade corn from insects and molds is paramount for the end quality of the food product, yet producers do not know which techniques are the most profitable. The goal of this project is to design an optimization model that will allow producers to choose the most profitable protection strategies for their operation.
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IMPACT: 2005/10/01 TO 2006/09/30<BR>
The expected impact from the organic dairy project is to provide more information for those dairies considering transitioning to organic production so that they can make a better decision. The expected impact from the food-grade corn stored product protection project is that farmers will be able to optimally choose the insect and mold protection strategies that are the most profitable.

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PROGRESS: 2004/10/01 TO 2005/09/30<BR>
The first completed research project is a market segmentation study of farmer buying behavior related to agricultural inputs such as seed and fertilizer. This project used cluster analysis to identify five distinct buying behavior types. The second project focus on Indiana farmers' decision to adopt corn that is resistant to corn rootworm and Indiana farmers' opinions about insect resistance management plans. This research uses a survey and focus groups of Indiana farmers about their decision to adopt the new transgenic trait that controls corn rootworm and their choice of refuge configuration.
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IMPACT: 2004/10/01 TO 2005/09/30<BR>
There are two expected impacts from this work. First, agricultural input firms must understand their customers' needs in order to serve them profitably. The research on agricultural input market segements identifies five distinct buying groups with different needs. Agricultural input firms can use this research to develop market bundles of products, services and information. Second, farmers have an increasing number of seed traits to choose between and this choice depends on market forces and regulations. This research is going to offer farmers an assessment of the profitability of these new technologies to allow them to make informed planting decisions. This research will also inform policy makers about farmers' views on insect resistant management plans.
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PROGRESS: 2003/10/01 TO 2004/09/29<BR>
The input industry has substantial impact on farmers production decisions, and on-farm profitability. In addition, the seed industry can strongly influence a farmers decision to plant a value-added crop. One component of this research uses a survey of Iowa farmers, and demonstrates a link between the farmers decision to adopt GM crops, and the information provided by the farmers seed dealers. The second component of this research uses a survey of Indiana farmers about their decision to adopt the new transgenic trait that controls corn rootworm. This work has two parts. First, a case study of the producers who are participating in the weed science and entomology experiments. Second, a survey of Indiana farmers examining their planting intentions for Bt corn rootworm. One hypothesis is that marketing concerns will dominate the farmers adoption decision because this technology is not approved for sale in the European Union.
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IMPACT: 2003/10/01 TO 2004/09/29<BR>
Farmers are offered an ever increasing choice set for seed corn, which further expands when a new trait is offered. This research is going to offer farmers an assessment of the profitability of these new technologies to allow them to make informed planting decisions.

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PROGRESS: 2003/01/06 TO 2003/09/30<BR>
I have started two projects in my first nine months. First, I have conducted a survey of grain elevators and a survey of farmers on their use of new generation grain marketing contracts. These surveys will provide some insight as to whether these new grain pricing tools benefit farmers. Second, I have started a project which is examining the spatial price linkages in the alfalfa hay market. This project has addresses two questions: a) to identify the alfalfa hay marketing regions, and develop price forecasting models for the USDA to use in their farm income forecasts, b) to test whether the development of online hay auctions has increased the degree of market integration by lowering transactions costs.
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IMPACT: 2003/01/06 TO 2003/09/30<BR>
Alfalfa hay is a niche market in Indiana, and one goal of this project is to identify what is the relavant marketing region for Indiana hay. A second goal is to develop hay price forecasts for the Indiana hay marketing region that would aid farmers in evaluating whether alfalfa hay would be profitable for their enterprise.