The State of Agricultural Net Markets

[From iSource Business, February 2001] Consumers are getting more and more picky about what they put in their mouths, notes Blair Louden, director, Grain-Canada for ConAgra Malt, Americas. Not that this is any reflection on his product or his industry, he says. "The brewing industry as a whole has always been very quality conscious."

Yet, the signs are clear. How a product is made and where the ingredients are grown is beginning to matter more and more when shoppers put together their grocery lists. "Proving the biological integrity of the raw materials we buy is about to become a very important marketing concern. We have to get our arms around this issue," says Louden.

Which means his suppliers are going to have to get their arms around the issue as well.

Louden's suppliers are barley farmers a group with more than a passing awareness of the latest agricultural trend of identity preservation. Convincing these suppliers to submit their farming modes and methods to third party scrutiny (a necessary marketing step when making such purity claims) after following certain environmental standards is not the problem. The problem is doing it efficiently and cost effectively.

Enter the agricultural marketplace another industry to go B2B.

Louden was no stranger to the B2B marketplace, having already participated in a Net grain marketplace called AgraLink. When AgraLink formed AgriPlace, Louden realized the site's new capabilities would allow him to help his suppliers verify the purity of their produce with minimal investment in time or money.

"It was clear that AgriPlace would be an appropriate conduit for setting up a pedigree or audit trail. We would be able to audit the farmers' growing methods and maintain a biological history of what we were buying," he says.

Basically, a potential supplier would access AgriPlace to see what protocol ConAgra demanded a process that, to the uninitiated, can seem surprisingly complex considering the requests for soil fertility, wheat identification and other agronomic measurements. In this system, the farmer does not contact ConAgra directly for the contract. Instead, he or she signs up for the contract at AgriPlace electronically, a process that helps ConAgra and the farmer control administrative costs during the contracting process.

By the time the crop is ready to be delivered to the malting house, SGS, an independent testing organization affiliated with AgriPlace, obtains a sample of the crop. From that sample, it is able to provide such information as the day the crop was planted, the day it was harvested, what the weather was like during this time and the day the crop was hauled to the grain elevator. All of this activity is coordinated, reported and tracked on the Production & Procurement Contracts area of the Web site.

Completing it Offline

But while the agriculture industry has followed the rest of the world onto the Internet, it has veered away from the traditional "buyer meets seller online and consummates a sale" business model. A lot of these exchanges focus more on the value-added functionalities and supply chain enablers, such as those provided by AgriPlace, than straight procurement activities.

While such services are clearly boons for the supplier end of the procurement relationship, the purchasing side recognizes their value as well. "In today's environment, trading is performed via a cumbersome manual process where there is limited visibility of trading partners and prices," says Mary Kay Haben, group vice president, Kraft Foods and president, Kraft Cheese and Mexico & Puerto Rico. "The services offered by Dairy.com [a new dairy exchange in which Kraft has participated as well as invested] will streamline the process by improving the coordination between buyers and sellers, allowing them to reduce inventory and logistics costs."

And lest you should think this is a reflection of a traditional industry being dragged kicking and screaming into the 21st century, more than a few analysts believe this focus on value-added services will become the winning model across most industries when all is said and done.

"A ton of Web sites have developed in the agriculture industry, but what we have concluded is that there isn't much trading going on in these sites," says Glenn Grimshaw, an analyst with Promar International, an Alexandria, Va.-based agri-business consulting firm that recently finished a report on e-commerce in the agriculture industry. Users tend to post their bids on these sites, he says, and go offline to complete the transaction.

Cell Phones in the Field

Promar held four focus groups among farmers in California, Mississippi, Illinois and Oklahoma to find out why. The relatively lower level of high-speed Internet connections available in rural areas was one obvious factor. Another was security: Many farmers "are highly concerned with the security of information online, even if they feel comfortable with the company they are conducting business with on the Net," Grimshaw says.

Also, for many farmers who value the long term purchasing relationships that have been developed over the years, the anonymity of the Internet was not appealing. However, the glut of information and services available did prove to be a source of interest. "A lot of the farmers were shocked by how much information and services directly relevant to their industry was available," Grimshaw says. And indeed, on many of these sites the service offerings are often far more sophisticated than on manufacturing-related counterpart sites. For example, on Citrustrader.com (recently acquired by eFruit.com) growers, processors and packers are able to negotiate contracts, hauling and schedule delivery online.

Also important to this group were the sites' efforts to streamline the distribution inefficiencies that are inherent in the agriculture industry. Farms.com, for example, has earned kudos for its strategy of pooling the purchasing and supply capabilities of geographically isolated buyers and sellers. Nor is AgriPlace the only site that has partnered with an independent testing house to provide quality control services. Naturebid.com, a "nutraceutical" exchange, recently signed an agreement with WorldwideTesting.com and Eurofins Scientific Inc., both providers of testing services.

Farms.com has also taken steps to address the connectivity problem among its suppliers by developing technology that allows part of its Web site to be accessible via digital cellular phones or palm pilots portable devices essential for men and women who spend most of their days in the fields.

To be sure, other industries have developed innovative services to ease distribution and connectivity problems. Yet, it's hard to find an industry more receptive to such improvement than agriculture.

These Net marketplaces, predicts Blair Richardson, vice president of auction services for AgEx.com, "will create cooperative communities where the exchange of information and ideas is more readily facilitated as well as the exchange of goods. This will be important as this industry moves to catch up with other industries that have already evolved and become more efficient over the past few decades."

At the bottom line, of course, these Net marketplaces do serve as a site to buy and sell produce. On AgriPlace, for example, there are some 600 farmers, grain resellers, processors, feedlots and brokers trading daily on the site. In a typical month, some 60,000 to 70,000 metric tons of grain are bought and sold. All told, this year some $35 billion in farm sales will be completed online, according to Goldman, Sachs & Co. By 2004 that number is expected to surge to $124 billion. Indeed, most of the sites have developed some fairly sophisticated catalogs. Exchange platforms in which buyers and sellers bid and rebid until a mutually acceptable price is found are also common although the auctions tend to be less common in this particular industry, Grimshaw says.

Yet, because of the relatively low transaction volumes that register on many of these sites (at least compared with other industries), two polar views relating to fee structure are emerging among the agricultural exchanges, Grimshaw says. "On the one hand, Cybercrop and others are claiming the merits of transaction fees." On the other, "there is a large and growing number of dot-coms who argue that transaction fees cannot generate revenue, either because of lack of trading, and/or because these fees are effectively a "sales tax" that will deter online transactions even if farmers and elevators want to conduct business over the Internet."

Among this latter group, however, Grimshaw says there is no real consensus on how to generate income in the absence of transaction fees. Some are pursuing registration fee structures and some are planning to charge for value-added services while others are really not sure. "Clearly, the revenue aspect of these dot-coms is an evolving issue that is becoming more and more important as investors look more closely at how dot-coms intend to become profitable," he says. On this point at least, the agricultural exchanges have plenty in common with the rest of the B2B world.

Erika Morphy is a freelance writer based in Washington, D.C.

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