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Potential for Markets for Identity Preserved Kentucky Grains

Aleta Botts
University of Kentucky

Final Report
April 1, 1999

Following the removal of guaranteed price supports for the major crops in the US by the 1996 Farm Bill, American farmers must approach their livelihood examining markets and the process of marketing more than ever before. Instead of assuming a given price for their goods, they must assume a greater responsibility for minimizing their financial risks and maximizing their revenues. At the same time, they encounter global competitors with rapidly increasing efficiency. As producers of commodities in the United States face increased marketing challenges both from home and abroad, they are charged with developing enterprising means of distinguishing a superior product which will command a premium over the average commodity accepting a given market price. One buzzword passed around currently is identity preservation (IP) — defined as the process by which a commodity is isolated through the entire production and marketing chain so as to produce an end-product demanding a premium for some unique quality.

The purpose of this paper is to evaluate the potential benefits and costs of developing identity-preserved marketing channels for Kentucky grains, particularly for producers. Previous studies, information regarding identity-preservation quality control, and news reports point to a future for those producers and processors that are able to distinguish their product in some market-chosen fashion and defy the label of generic “commodity.” However, the potential for growth in this area may be offset by the time and resources taken to prepare producers, marketing channels, and end users for handling specific grain identities. At all points in the marketing process, the enterprises will be asking at what point in the future will this ability translate into premiums that justify the process.

To begin, a review of recent news reports and journal articles frame the discussion by exploring the national trends and issues in identity preservation.Following this is a summary of survey results with various agribusinesses in the state that handle grain. Some specific examples of identity preserved projects are included to provide an idea of the costs and merits of such marketing.A final analysis of the potential for identity-preserved Kentucky grain concludes the paper.

In the News

Ten years ago few people in grain marketing would have known the meaning of the term identity preservation (IP). Now, however, all parties have been forced to become familiar with the term and the challenges it presents to current marketing systems. Demonstrating the changed attitude toward traditional co-mingled crops, a 1997 Feedstuffs article was entitled, “Commodity-based Marketing Becoming Thing of the Past” and mentioned the benefits of “specific-attribute grains” to the needs of producers, suppliers, processors, and customers (Pfeifer and Boehlje). In this section we explore the impetus for the change from traditional co-mingled crops, the management issues of IP, the development of new enterprises and new information technology to assist IP markets, and the expectations in the industry.

Impetus for Change: Premiums are usually cited as the dominant force pushing the increased interest in identity preserved products. Producers can now grow genetically engineered grains that possess special user-desired traits, such as high-oil content, that command a premium if they are kept isolated from less superior grains. This increased demand for genetically modified organisms (GMO) is somewhat offset by the interest from some nations and consumer groups in non-GMO certified products. Additionally, consumers are increasingly aware of nutritional content and environmental friendliness of agricultural products. All of the factors could result in a premium for a certified IP product.

Genetically modified organisms range from those that merely change production practices - Roundup Ready soybeans allowing for greater pesticide penetration - to those that change the end-product in some way - high-oil corn or high oleic soybeans.The latter commands a premium in the market by providing processors of livestock producers with a superior product with a desired specific trait. Only 4% of the corn in the US in 1997 was estimated to be “specialized,” but some in the industry believe that the acreage for high-oil corn would double yearly through 2000 (Looker 1997).

Consumers and countries opposed to the use of genetic engineering are also creating a market for certified non-genetically engineered crops. The European Union and Australia are still deciding whether to require appropriate labeling of GMO’s and products that contain them. Some US trade representatives charge that such a requirement would be too costly for the US grain industry and that the requirement is simply an example of a non-tariff trade barrier. A Feedstuffs Opinion column cites the National Grain and Feed Association’s figure of $80 billion as the cost for such segregation of GMO products, excluding such costs as separate transportation systems and on-farm storage separation (“GMO Labeling” 1997).

Some companies are taking the approach of informing the European consumer about the science in the hopes of alleviating some of the concerns about GMO’s.Monsanto and Zeneca have both produced advertisements explaining their products in Europe (Kilman 1998). Nevertheless, the resistance to open acceptance of GMO’s in Europe is great. A study in Great Britain this year discovered that 58% of those polled “oppose the introduction of genetically modified food. ” This is an increase from 51% that felt that way in 1996 (Kilman 1998). A study by the European Commission in 1997 found that “70% of European consumers would still avoid eating the genetically modified food products” even if the quality of the product were improved by its GMO status (Elliott 1997). This preference for non-GMO food products presents challenge to those growing genetically engineered products, but opportunities to those growing “traditional” crops. Indeed, in a recent study by the Australian National University and the University of Melbourne, researchers found that survey respondents were likely to approve of biotechnology in general, but a desire for labeling GMO products came with this approval (Kelly 1995). The Australia New Zealand Food Standards Council, composed of health ministers from the area, recommended on December 17, 1998, that the Australia New Zealand Food Authority require labeling of products if the manufacturer knows the product contains genetically modified material or if the manufacturer cannot be certain that the product does not contain GMO material. Regardless of whether biotechnology-manipulated foods pose actual health risks, the continued perception of some groups will allow greater demand for products that can certify a non-biotech history. For this certification to be valid, an IP program must be established and followed.

Although biotechnology has revolutionized many crops for US producers and consumers, the technology has affected small grains much less than corn or soybeans. This lies in the apparent difficulties for scientists in manipulating the genetic make-up of small grains that reproduce differently than those crops that have already been changed. Nevertheless, small grains can still benefit from identity preservation in the developing market for organic products and products with greater nutritional value. In fact, a short note in the February 12, 1998 issue of the Wall Street Journal cites the growth of organic food products by “mainstream” companies (Organic 1998). The article notes that General Mills may be marketing an organic flour that costs an extra $1 per bag. According to a research firm in Washington, the $3.5 billion organic foods market holds interest for almost one-fifth of consumers (“Organic” 1998). Although this organic market once only concerned fruit and vegetable products, the market is widening to include grains such as corn, soybeans, spring wheat, and oats. Thomas Dobbs points out the possible premiums for the grains over traditionally produced and handled grains in a recent CHOICES article. This material is covered in Appendix A.

Management Issues: The idea of controlling the identity of grains throughout their production and processing frightens many people in the industry worried about the increased quality control and the necessary changes in management practices required to assure product identification. Producers already treat storage, record keeping, and marketing as important aspects of their business. However, identity preservation requires even greater attention to these factors. The emphasis on isolation of a variety requires special care to ensure non-contamination. Crop-Net offers several tips - shown in Box 1 - from specialty crop experts.

Identity preservation requires greater coordination at every step along the supply channel. To accomplish this stricter organization, contracting becomes more important to both ensure a marketable product for the producer and a value-enhanced, non-contaminated product for the processor (Ginder 1997). Ginder points out that the increased information exchange that accompanies specialty grains - from end-processor to marketers to producers and back - can be handled through more detailed contracting that reduces the risks and preserve the desired end-qualities for the buyers (1997). Almost half of those companies handling identity-preserved grains acquire or sell their grain through contracts (Schuff 1999 and Muirhead 1999).

New Enterprises: One way of shortening the expected learning curve for identity preservation management is the creation of new enterprises adapted to such specialized production and processing. Farmer cooperatives and joint ventures between large agribusiness firms have helped both producer and processor to enter and sustain the market for identity preserved grains.

The case of the American White Wheat Producers Association (AWWPA) provides one example of a farmer-owned cooperative developing an identity preserved market in a region. The Kansas Association of Wheat Growers formed the White Wheat Task Force with producers, seed representatives, industry representatives, and members from the Kansas Agricultural Experiment Station. This Task Force decided that the conventional means of marketing grain in Kansas resulted in inadequate returns of producers and that the current marketing system could not handle an identity preserved introduction. As a result, it suggested the formation of the cooperative AWWPA. Farmers joining the cooperative must subscribe to specific production conditions to market their grain through the cooperative. AWWPA itself owns no transportation, milling, or storage facilities; it handles the grain by contracting with traditional agribusinesses and marketing directly to bakers (Brester 1996).

In research and development of value-enhanced grains, Optimum Quality Grains is a new company formed by Pioneer and DuPont to facilitate the development and transfer of grain technology to producers. The market pressure provided by such giants in the industry may well create a domino effect causing marketers down the line to pay more attention to the qualities being supported by new and improved seed varieties. One representative of Optimum Quality Grains envisions a future for elevators that develop their specialty grain business and the logistics to handle the specialty grain. The company offers the enhanced seed products and “licenses the vertical integration to others” (Looker 1997).

Technological Developments: New enterprises are not the only new development to assist producers interested in identity preservation. New testing and information technologies are providing support in the new marketing structure:

In 1997, “Specialty Grain Marketplace” was introduced as a subscriber-based computer program providing timely information to producers on contracts and markets of specialty grains (E-Markets 1997).

Optimum Quality Grains has introduced OSCAR (Optimum Sales Connection and Resource) for elevator managers and purchasers to track those producers growing value-enhanced grain and for producers to locate premium-paying elevators in their area. Frozen Food Digest quotes Optimum Vice President and Director of Operations Frank DeGennaro, “Optimum’s ability to deliver crops with added-value traits through biotechnology will be greatly strengthened through effective use of information technology (“Innovative” 1998).

Elevator managers and other industry personnel are becoming more familiar with improved testing equipment capable of measuring grain composition (protein, oil, starch, fiber, and texture). Electronic near-infrared analyzers were used in an Iowa study about value-enhanced grain marketing. Fifteen elevators in the study are purchasing these instruments with financial help from the Iowa Department of Economic Development (Hurburgh 1997).

Expectations: What currently is happening in identity preservation is often overshadowed by what’s around the corner. Expectations by industry representatives and consumers alike rarely point to exact outcomes, but they do provide an idea of what future incentives will be created and how the industry will be responding in the next ten years.

Regulatory barriers to trade, such as the labeling issue currently being discussed by the European Union, are likely to increase. Increases in real income - in Europe and the rest of the world - will result in greater interest in food safety issues that were less important when the mere access to food was in question (Thilmany and Barrett 1997). Now that consumers have more income and greater choices within their budget, they may be more likely to demand greater labeling of foods regarding additives, growing processes, and biotechnological inputs. This will increase the demand for goods that can accurately show the information that consumers want, and increased demand that will necessarily trigger more identity preserved products.

Grain Industry 2000, a study of grain elevator managers and merchandisers, shows a future for identity preservation. As cited in the August 11, 1997 edition of Feedstuffs, two-thirds of the respondents do not believe that IP is important today, but they repeatedly mentioned their view that IP grains are the future of grain handling. More the 80% of the interviewees believed that IP will be important in five years, think grain companies will have to identity preserve grain eventually, and expect to receive premiums for handling specialty grain. Most of the managers/merchandisers plan to “increase their involvement in specialty grains over the next two years” and over 40% expect these grains to total on-fourth of their total volume in five years (“Industry” 1997).

Although the predictions for the future use of specialty grains are optimistic, current use is somewhat less hopeful. A recent survey by Feedstuffs of grain end users suggests that while this group expects the amount of specialty grains to increase, most respondents believed that less than one-tenth of their grain purchases “would likely involve the specialty varieties” and that “the volumes of value-enhanced grains are so far too small to be profitable” (Muirhead 1999). The attitude among users is that the expected gains from specialty grains are not currently worth the greater premiums paid for these specialty grains and the costs in handling them as compared to conventional crops.

The potential for small grains to become more identity preserved may increase as the American wheat market looks to increase its share of the world grain market. A recent article cites the stable nature of US wheat exports over the past thirty years. Lee Schatz, the deputy director of analysis of the USDA’s Foreign Agricultural Service, stresses that the domestic wheat sector must turn its attention overseas in determining what foreign customers want and are willing to pay for. This attention, he says, will likely require such measures as “more identity-preserved shipments, tighter specifications, more cleaning, and other controls on how the wheat is raised and handled” (Maixner 1999). Additionally, several companies have established research alliances that have the express purpose of producing new varieties of wheat. Both Zeneca and DuPont have developed affiliations with two research laboratories in Great Britain to increase the genetic potential of wheat (“Zeneca” 1998 and “DuPont” 19998). Additionally, an imidazolinone tolerant wheat - similar in function to Roundup Ready soybeans - may be placed on the market as early as 2001 through a joint agreement among AgriPro Seeds, Inc., American Cyanamid Co., and United Grain Growers Ltd. (“Firms” 1998).

Kentucky’s Case

To determine the current and future relevance of identity preservation to Kentucky’s grain economy, representatives of ten grain handling facilities and two integrated poultry facilities were interviewed. The earlier elevator study in Iowa stressed the elevator as the “key point for segregation of grains by quality” (Hurburgh 1997). Primary emphasis was given to elevator managers; eight of the interviewees represented elevators or milling operations. Two poultry producers were interviewed to ascertain the possibility of increased markets for IP grains in this area. The final two individuals were a baker manager and a representative of Miles Farm Supply, a company that is currently handling specialty grains in western Kentucky.

Elevator Managers and Grain Handlers

None of the elevator representatives were currently involved in identity preservation, aside from one white corn operation. Half of the managers believed that there was some IP occurring in their area, however. Miles Farm Supply is heavily involved in specialty grains and identity preservation, particularly corn and soybeans.

Although two interviewees saw no problems with handling IP grains, most of the respondents mentioned storage, verification, and transportation issues. The larger operations are especially concerned regarding the need for smaller storage bins for the different types of specialty grains in the future. When asked about the changes that would have to occur to make identity preservation more attractive for their business, respondents predictably stated that a larger premium would be necessary to justify their extra time and expanse. Miles’ representative simply stated that with larger premiums, more producers would be willing to produce a specialty crop. This larger premium would result from greater demand for the product. Additionally, greater volume in IP grains would allow the handlers to assume the greater economies of scale that they currently find in co-mingled grains. Appendix A of this report provides an overview of cost and premium estimates for identity preservation from several sources.

The grain handlers do believe that greater specialization will be occurring in the industry in the future. According to the survey, producers will be more likely to be raising specialty crops and will be assuming more control over the marketing aspect of their business. When asked to quantify their belief in greater specialization over the next five years on a scale of 1 to 5 (1 = no changes to current systems to 5 = drastically different from current co-mingles system), every respondent conservatively gave an answer from 2 to 4. When asked to comment, they mentioned the opposing sides of the issue: the need for farmers to develop more specialized products and the need for markets to which the handlers can sell.

The current economic situation was mentioned by two interviewees as an influencing factor in the decisions to produce and market identity preserved grains. A strong farm economy and relatively stable prices for identity-preserved crops would produce more risk-taking among producers that are struggling with sluggish prices in their current situation. This problem is transferred down the entire agribusiness marketing chain as unpredictability assails the agricultural industry amid less control from the federal government and less demand from ailing Asian economies.

The overall impression one gets from grain handlers in Kentucky is that identity preservation is inevitable for the agricultural system, but that there are too many barriers to overcome to establish the system currently. As demand from consumers increase and they grow to expect a greater precision in products, companies will respond with greater incentives for producers, handlers, and millers willing to take the extra effort to segment these grains.

Poultry Producers

Developing a market for specialty small grains in Kentucky among the new poultry operators in the state will take more than the entrepreneurial marketing sometimes required for other specialty grains. Dr. Austin Cantor, poultry specialist at the University of Kentucky, suggests the problem with marketing small grains such as wheat and barley to poultry house operators lies more in the intrinsic properties of the grain than in the development of the market. Both wheat and barley possess chemicals - beta-glucans and pentosans, respectively - that minimize the digestive efficiency of the grain by the bird. In barley specifically, this chemical may result in poor growth, poor feed conversion, and sticky droppings. Removing the hull of the barley, as some entities are currently exploring, will not eliminate the problem, as the chemical is stored in the endosperm of the grain. The drop in digestive efficiency can be compensated by the addition of an enzyme to the feed. However, studies show that even with this enzyme, yields are lower than if the birds were on a corn diet (Cantor 1999).

Given this constraint, the demand for a small grain engineered to produce less of this chemical would appear to be high. Nevertheless, Dr. Cantor doubts that there would be a fundamental reason to develop such a variety in Kentucky given the plentiful supply of alternative poultry feeds (corn and soybeans) that partly attracted the poultry operations to this area in the first place (Cantor 1999). An article on broiler production based on a wheat diet suggests that the use of wheat in broiler diets is due primarily to “the unstable corn supply and the currency devaluation in some regions.” The article goes on to cite the substantial variability in performance of wheat-fed broilers, even though the negative correlation between some of the inherent traits in the wheat and the lower level of metabolizable energy could not be established (Liang and Liu 1998). Nevertheless, poultry producers will be hesitant to adopt wheat-prominent diets for their operations if corn is available and if uncertainty exists concerning the effects of the wheat.

In speaking with poultry house operators currently operating in Kentucky, the use of identity-preserved grains in their operations does appear possible in the future. However, neither of them are currently doing it now and both mentioned only the appearance of high-oil corn as likely. They both suggested that they were keeping an eye on the potential benefits of high-oil corn, but were cautious about the actual benefit to the bird. Both mentioned the lower feed efficiency of small grains as well as the ready supply of other grains as factors in their decision to feed corn and soybean diets in their poultry houses.

Final Analysis

Greater market segmentation of grains appears possible as consumer groups develop different, contradictory preferences. While one group may desire only non-GMO, completely organic foods, another may want fortified, biotech-enhanced super foods. The only way to accommodate these consumer preferences is to preserve the identity of a seemingly homogeneous product throughout its production and processing life. Agribusiness institutions will do this for the expected premium that the consumer will pay for the end-product, a premium that must be passed back along the supply chain to reach every entity incurring extra cost to preserve the identity of the product. Currently, such a premium exists only in highly specialized, often vertically integrated, operations.

The conclusions drawn from national surveys mirror that drawn from this small Kentucky study. The prevailing message is that specialty grains have potential, but the extra care involved in their handling prevents more rapid adoption. This extra care includes understanding customer needs, establishing “networks of complex business alliances,” and developing “new logistics for handling identity-preserved grains,” according to the recent meeting of the Second International Value-Enhanced Grains Conference (Schuff 1999).

What does this mean for the Kentucky grain producer, elevator manager, and merchandiser? While a decision now to grow and handle IP grains may be risky, those producers and marketers that solve the problems of today’s IP systems will be that much better equipped to handle the growth in the industry that many believe is inevitable. By locating niche markets for these specialty grains and establishing relationships for the marketing of these grain, Kentucky may be able to get the jump-start on much larger grain-producing states. Because of Kentucky’s smaller operations, its producers may be even more suitable to such IP systems. However, it does not appear that small grain growers will be able to take advantage of the growing poultry industry in the state, given the availability of corn and soybeans and their apparent superiority over wheat in poultry diets.

References

• Abraham, Herb. Personal Interview. March 31, 1999.
• Brester, Gary W., Arlo Biere, and Justin Armbrister. “Marketing Identity Preserved Grain Products: The Case of American White Wheat Producers Association,” Agribusiness. Vol. 12, No. 3, pp. 301 - 308 (1996).
• Cantor, Dr. Austin. Personal Interview. January 27, 1999.
• Dobbs, Thomas L. “Price Premiums for Organic Crops,” CHOICES Second Quarter 1998. p. 39.
• “DuPont Establishes Wheat Research Alliance,” Feedstuffs. September 23, 1998.
• “E-Markets and DTN Announce Specialty Grain Marketplace,: E-Markets, Inc. Press Release November 3, 1997.
• “Firms Sign Research Pact on Wheat,” Feedstuffs. November 23, 1998.
• Ginder, Roger G. “Specialty Markets Bring Different Management Needs,” Feedstuffs.February 24, 1997. pp. 10-1, 18.
• “GMO Labeling: It’s Nothing More Than a Trade Barrier,” Feedstuffs. June 30, 1997. p. 8.
• House, Charles. “Illinois Survey Details Specialty-Grain Premiums,” Feedstuffs. January 25, 1999. p. 21.
• Hurburgh, Charles R. “Initiation of End-User Specific Grain Marketing at Iowa Elevators.” January 1997.
• “Identity Preserved Canola Handling in Canada, “ Report by the Manitoba Pool elevators, Saskatchewan Wheat Pool and Alberta Wheat Pool, 1996.
• “Industry Reveals Expectations, Concerns,” Feedstuffs. August 11, 1997. pp. 16, 19.
• “Innovative Use of Technology Enables Real-Time Contracting,” Frozen Food Digest. April - May 1998. Vol. 13, No. 4, p. 43(1).
• Kelley, Jonathon. “Public Perceptions of Genetic Engineering: Australia, 1994,”Australia Department of Industry, Science, and Technology. May 1995.
• Kilman, Scott. “Monsanto Brings ‘Genetic’ Ads to Europe,” Wall Street Journal.June 16, 1998.
• Lane, Mike. “Farmers Join to Grow, Sell New Meat,” Successful Farming. February 1998.ol. 96 No. 2, p 38T(1).
• Liang, Chao and Yonggang Liu. “AME Examined in Relation to Wheat-Fed Broilers,” Feedstuffs. October 5, 1998. p.12 - 15.
• Looker, Dan. “New Developments in Specialty Grain Contracting, “ Successful Farming. February 15, 1997. Vol. 95, No. 3, p. 18(4).
• Maixner, Ed. “U. S. Wheat Exports Seen as Flat in 80% of World Market,” Feedstuffs. February 15, 1999. p. 2.
• Marshall, Rob. ISO 9000: A Decision Maker’s Guide. Center for Robotics and Manufacturing Systems, University of Kentucky. December 1993.
• Muirhead, Sarah. “Value-Enhanced Grains Attract Interest, But End User Adoption Still Limited,” Feedstuffs. January 18, 1999. pp. 1, 29.
• “Organic Food Looks,” Wall Street Journal. February 12, 1998.
• Premium Standard Farms Company Information from Internet page: http://www.psfarms.com/page19.html
• Schuff, Sally. “Search For Profits From Specialty Grains Not For The Timid,” Feedstuffs. February 22, 1999. pp. 1, 15.
• Thilmany, Dawn D. and Christopher B. Barrett. “Regulatory Barriers in an Integrating World Food Market,” Review of Agricultural Economics. Spring - Summer 1997. Vol. 19, No. 1, pp. 91 - 107.
• Voehl, Frank, Peter Jackson, and David Ashton. ISO 9000: An Implementation Guide for Small to Mid-Sized Businesses. St. Lucie Press: Delray Beach, 1994.
• Werblow, Steve. “Turning the Corner to Specialty Grains,” Crop-Net: Crop Protection WebSite. http://crop-net.com/archive/ffeatmw3.htm
• Wheat, David. “Evaluating the Cost of Segregation and Identity-Preserved Handling and Processing,” Presentation at Conference for Understanding the Commercial and Regulatory Issues for Genetically Modified and Novel Foods and Food Ingredients in Brussels. September 25, 1997.
• “Zeneca Invests in Wheat Genetics Research Program,” Feedstuffs. November 28, 1998. p. 5.

Appendix A: Estimated Costs and Premiums for Identity-Preserved Grains

The decision to produce and process identity-preserved grains depends on the possible premiums and costs for the extra handling, separate storage, and yield variation. Numerous studies have been conducted in an attempt to determine the feasibility of identity preservation. This section is an overview of some of these studies.

The reason for a crop’s IP status causes the premium to be present. The genetically enhanced crops, such as high-oil, waxy, or white corn, possess an attribute that makes them more attractive for processors or livestock producers. This extra attribute will likely mean less inputs or less processing, two traits for which the purchaser will pay a premium. Crops that are identity preserved to certify their non-GMO or organic status also possess a desired attribute for the purchaser. However, this attribute does not result in lower costs for the purchasers. Rather, they must obtain a premium from their customers for the attribute.

Table 1 depicts the estimated costs and premiums for two different types of IP crops. As expected, premiums are being received for value-enhanced crops that justify their identity preservation. However, non-GMO products are not yet receiving the premium required to justify the cost of keeping them separate from co-mingled crops. Although consumers may say that they want the certified non-GMO food products, they have not yet demonstrated sufficient demand to overcome the substantial costs to segregate these crops.

A recent study by Thomas Dobbs of South Dakota State University attempts to determine the relative premiums received by producers of organic grains in 1995, 1996, and 1997. Dobbs compared prices of organic crops to the cash price and the future exchange price (Chicago Board of Trade for corn, soybeans, and oats; Minneapolis Grain Exchange for wheat). Table 2 shows these price differentials. Dobbs points out that although the returns for organic crops are “substantially higher” than conventional crops, organic farmers are “quite entrepreneurial in the marketing,” suggesting that much of the success of the marketing of these crops comes not only from the intrinsic value of the crop, but also the personal marketing initiative of the producer (Dobbs 1998).

Table 1: Estimated Premiums and Costs from selected studies of identity preserved products

Crops Preserved for Enhanced Value

¹ $.10 for 6% to $.40 for 8.5%
² This price was artificially constructed as $.30/bu. over the read wheat price.

Crops Preserved for non-GMO or organic identity

Table 2: Comparison of Organic Grain Price Vs. Future and Cash Price

Source: Dobbs, Thomas L. “Price Premiums for Organic Crops,” CHOICES Second Quarter 1998. p.39.

Appendix B: What is ISO 9000 and what is its relevance for IP?

For identity preservation to work at all, buyers of the grain or the end product must be sure that the product both truly possesses the desired characteristic(s) and also has not been co-mingled with any inferior grain. To make such a claim, grain handlers will have to develop an extensive quality control mechanism that works throughout the product’s life. The standards of the ISO 9000 series, used extensively by the manufacturing sector in the United States, is now taking on greater importance in the agricultural production sector. This appendix defines and explores the ISO 9000 system and discusses its relevance to identity preserved grains.

ISO 9000 was adopted in 1987 as a set of standards by the International Organization for Standardization. The goal of these standards is to establish consistent quality requirements and guidelines across industries and nations. Companies first determine which standard (ISO 9001, 9002, or 9003) is appropriate for their particular operation. After this determination and establishing a commitment at all levels of the organization to the goal of ISO certification, the organization must analyze its current activities and how the product or service flows through the company. A review is then conducted to determine what procedures are required to maximize quality. Developing these procedures is next, accompanied by extensive documentation of procedures and processes. After documentation, the program of quality assurance is implemented. Overlaying the steps of the process is the work of internal auditors who are trained before the process is implemented to check compliance with the developing quality system. Following the process implementation, an outside party assesses the system and grants ISO certification to the entity if the outside audit shows completion of the ISO requirements (Voehl, Jackson, and Ashton, 1994). Some examples of requirements of the ISO 9000 system are the specification of persons that will be responsible for releasing the conforming product, detailed action plans for problems, and efficient document control (Marshall 1993).

Companies attain ISO 9000 certification to increase their product or service quality and to be able to state that an independent party had accredited their quality.This accreditation can lead to higher esteem of the company’s systems and better customer perception of the company. Companies interested in identity-preserving grains will be interested in the standards as an assurance to buyers that the grain, or its subsequent products, has a desired trait and consistency across the entire quantity.

The United States Department of Agriculture has recently taken greater notice of the need for reliable quality control in agribusinesses, implementing several programs designed to make independent assessments of quality. The USDA Process Verification Program, operated by the Agricultural Marketing Service, conducts audits of livestock and meat producers to ensure the provision of consistent products and uses the ISO 9000 guidelines. The Chief of Standardization in the Livestock Division of AMS, Herb Abraham, states that the goal is to ensure that the end product is indeed what the company says it is. This differs from the standard grading and certification performed by the agency in that it is designed to establish quality throughout the process. Abraham cited two processors that the AMS had worked with, Premium Standard Farms and PM Beef Group. Premium Standard Farms is the fist company to go through a complete audit through the Process Verified program and bills itself as the only pork supplier “that can achieve Process Verified accreditation through all phases of production” since it is the only producer that is completely vertically integrated from farm to market (Premium Standard Farms, 1998). Two of the benefits, according to the company, of such accreditation are consistency and traceability. The company reimburses the AMS for the costs involved in the audit, which usually total within $2000 - $5000. Abraham was not aware of any similar program being conducted for grains by the appropriate agency, the Grain Inspection, Packers, and Stockyards Administration (GIPSA), but he did mention that the fruit and vegetable division of AMS has a Quality Through Verification (QTV) program that accomplishes similar goals. Starting the initiative within the livestock sector is likely linked to numerous recent food safety scares with pork and beef.

Such a quality-auditing program could guarantee the identity of a specific grain to its buyer, and thus is likely to be worth the minimal cost to the company and the government. However, the quality of identity preservation must be valued at a sufficient level to justify undertaking the ISO 9000 certification process and the subsequent audit by either an independent contractor or government agency. Currently, the demand for such IP grain has not developed sufficiently to create an overriding need for such certification. When such demand for segregated grain does appear, vertically integrated operations will be able to take advantage of establishing a reliable quality management system.

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