Look in the rearview mirror of the ag industry and you can still see all the predictions and promises about identity-preserved (IP) or value-added crops. They were supposed to be a big part of your future ag profits. Set your eyes on the road ahead, however, and the view is a whole lot different.
In less than 10 years, the industry that was expected to take many farmers out of a commodity-driven economy and boost their fortunes has faded into almost commodity grain status. It's time for everyone to re-evaluate if they want to get involved.
“The IP industry isn't dead. But, it certainly is growing slower than we thought it would,” says Texas A&M ag economist Danny Klinefelter. “We're looking at 10- to 15-year horizons for some products rather than the five years we anticipated.”
In case you've forgotten, the basic theory of IP crops was that the industry's food chain would be linked from seed that farmers plant all the way to consumers to satisfy their particular demands. The industry would coordinate its various segments into an efficient, value-added supply chain. And everyone along the way would profit.
The early beliefs that farmers could receive premiums of $1/bu or more have yielded to the reality that 5-25¢/bu premiums may be as good as it gets for most farmers in today's market.
“We see premiums for food-grade soybeans up to $1.50/bu, depending on the yield potential of the variety. Organic soybeans receive even higher premiums,” says Marv Wilson, Iowa Soybean Promotion Board executive vice president. “An emerging market for food-grade soybeans in the U.S. has been stimulated by the health claims for soy protein that FDA approved in 1999.”
So what happened? Industry experts agree that it wasn't a single event that has downsized the perceived IP market potential. Right now, they say, the whole industry is evaluating the true IP market and its realistic profit margins.
“As an industry, we thought traceability was going to come on like gangbusters, but it hasn't,” Klinefelter says. “As long as economics is the driver, however, the growth is going to be evolutionary rather than revolutionary.”
From an industry viewpoint, the IP market has grown about as predicted, according to Identity Preserved.com President Tim Aughenbaugh. His company provides the technological tools and systems to track products with special traits through the food chain.
“It's all a matter of expectations,” he says. “It's similar to the original hoopla over precision ag technology. Intellectually it makes sense, but ag inherently reacts on a time scale that's more appropriate. IP, however, is much more far-reaching and has more direct application.
“Everything out there today tells us that IP will continue to escalate,” Aughenbaugh says. He bases that belief in part on the continued growth that he's seen in his own company over the last few years.
That means contract opportunities for farmers, Aughenbaugh says. “Quite frankly, some of it's just being in the right place at the right time. Geography often plays a role in where these crops are grown. But the industry is looking for growers who have shown the skills, willingness and capability to work with the IP industry.”
It's apparently a case of who and what you know. “Interested farmers should talk with their seed dealers and grain companies to find out what IP contracts might be available,” suggests Russ Sanders, who's in charge of End Use Account Management at Pioneer. “There are opportunities for white and yellow food-grade corn for both domestic and export use. There's an emerging market for high extractable starches in the corn wet milling industry. And livestock integrators are looking to source their feed to eliminate variability.”
And the premiums? “Again, it's all about expectations. The level of premiums farmers receive will likely stay where they are today,” Aughenbaugh says. “Growers need to realize that once production of a differentiated crop becomes normal, premiums decrease. The flip side is that, over time, it becomes less easy to displace a farmer because of the track record that's been established.”
Economics always wins. For growers in the IP market, that means you have to be the least-cost producer, according to Larry Stenberg, the Trait, Stewardship and Channel Leader for Dow AgroSciences.
“We have IP crops that have been commercialized and sold. And we have additional products in the pipeline,” he says. “But crops in the IP system have to deliver more value to end users and still support the cost of producing it.”
Farmers get paid premiums based on two factors, according to Stenberg. “The biggest part of the premium has been to offset the cost of yield drag that's sometimes associated with an IP crop. The less yield drag, the lower the premium,” he says. “After that, there are incremental increases based on the increased management requirements of the crop.”
In other words, farmers are awarded premiums based on the value they add to the crop, not the value of the crop as a finished product.
Another sign of the changing IP market is Pioneer's decision to shut down its Optimum Quality Grain Web site. The site allowed growers to enter their area codes and find IP contracts available near them.
“Our involvement is moving toward the field level and helping our sales staff identify IP opportunities for our products and our customers,” says Sanders.
“We're still a believer that the industry will evolve from input traits to output traits,” he says. “But we're more realistic about the level of investment it takes. Part of the problem has been that the technology suppliers haven't brought products to the market that make a difference to consumers.”
Market gains for IP crops haven't slowed due to regulatory issues, according to Jeff Stein, Director for Regulatory Affairs for Syngenta Seeds. Market growth has been “a marketing issue, not a regulatory issue,” he says.
“We've had some shift in our research effort and are moving toward products that improve processing quality — products that allow better energy conversion so you need fewer inputs to get the same outputs,” Stein says. “We've got pharmaceutical and industrial enzymes in the pipeline, but it will probably be at least five to 10 years before they reach the product stage.”
It's that last group of crops that has the biotech industry in a stir right now. With the dark shadow of StarLink still looming over the industry, everyone is approaching pharmaceutical and industrial enzyme products with caution.
Spokespersons for the biotech industry make no secret of the fact that pharmaceutical crops will be tightly controlled on small acreages. Industrial enzyme crops represent a larger market. They, too, will require strict production protocols to prevent their entry into commodity grain channels.
But, as they become more common, it's likely that their premiums, too, will drop until they satisfy the lowest-cost producer.