1. 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

2. 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 owner’s 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 Two Clashing Perspectives

3. 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 owner’s 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 Two Clashing Perspectives

4. Agenda Emphasize opportunity in segmentation Ag structure –Heterogeneity –Perspective An example of segmentation’s benefits –Ownership –Customer

5. Yesterday – Not That Long Ago

6. Today: Early in the 21st Century

7. 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

8. Some Dimensions of Being a Farmer Farmers: Aren’t They All the Same?

9. U.S. Farms by ARMS Typology; 1998 Limited Resource, Retirement, & Residential Farming Occupation Large & Very Large Family Farms Non-Family Farms 61.8% 28.8% 7.5% 2.0%

10. Acreage Operated; 1998 Limited Resource, Retirement, & Residential Farming Occupation Large & Very Large Family Farms Non-Family Farms 20.6% 41.8% 30.1% 7.5%

11. Acreage Owned Versus Rented Limited Resource, Retirement, & Residential Farming Occupation Large & Very Large Family Farms Non-Family Farms 76.2% 57.0% 40.7% 80.0%

12. Limited Resource, Retirement, & Residential Low Sales High Sales Farming Occupation Large & Very Large Family Farms % Employing Selected Management Practices

13. Cooperative Membership Limited Resource, Retirement, & Residential Low Sales High Sales Farming Occupation Large & Very Large Family Farms

14. Linkages Interests of majority of farmers differ from interests of farmers who produce majority of farm output

15. Where Does the Farm Household’s Income Come From?

16. Total Household Income: Where Farming Subtracts Limited Resource Low Sales Farming Occupation RetirementResidential Lifestyle

17. Total Household Income: Where Farming Adds High Sales Farming Occupation Large Family Farms Very Large Family Farms

18. Hours Worked On & Off the Farm: Family Farm Households Low Sales High Sales Farming Occupation Large Family Farms Very Large Family Farms 29.8% 24.1% 18.3% 18.9%

19. 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

20. Who’s Well Off? Joe Average

21. 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

22. Farm Income Support Policies Low Sales High Sales Farming Occupation Large Family Farms Very Large Family Farms * Government payments only for those farms receiving payments Remember the independent family farmer

23. 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

24. The Farmer’s Neighbor: Friend or Foe?

25. Tenure Dynamics in the Midwest Full owner Part owner Full tenant

26. 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

27. Assume a Commodity Market

28. Share of Hog Production- By Type of Vertical Coordination 1970-1999 Now Above 80%

29. 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

30. Segmentation

31. New Zealand Merino Creating a Silk Purse From a Sow’s Ear

32. World Wool Production and Price: 1970-2000

33. Old and New Substitutes Growing

34. 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 NZ’s average quality for low value markets

35. A Silk Purse From a Sow’s Ear

36. 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.

37. From Vision … to Reality.

39. Unique Marketing Propositions. Offers Brand Partners…

40. These may include Intel inside co- Branding Relationship with some Partners

42. And less obvious exclusive arrangements with others.

43. Financial Performance 2002 FY Turnover: NZD $85 mil NZM auctioned wool: – 12% price premium compared to competition 82% return on Investment

44. 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