Food commodity production characteristics

2.25 The farm-level production of many food commodities and raw materials has features which render such production inherently risky, heighten transaction costs in a market setting, and inhibit effective coordination of production with downstream operations and consumption. First, compared with manufactured products, food products tend to be produced over a geographically more dispersed area and by individual producers who are smaller in scale and less specialized. This production pattern may result in high costs for crop intelligence and transmitting information to producers regarding consumer preferences. This production pattern also contributes to potentially high transportation costs in the collection of raw materials or animals, thus interrupting physical commodity flows. The output of a small producer may also be insufficient to warrant investment in proper storage facilities or standardized containers, perhaps leading to additional handling activities or requiring additional quality inspection. All of these imply added transaction costs.

2.26 At the same time, small, dispersed producers may possibly face a situation of monopsonistic competition with only one or very few active buyers in their area. There is frequently a considerable mismatch between the efficient scales at the level and in subsequent processing operations. A market structure featuring a relatively large processor and multiple small suppliers may emerge with asymmetric information and considerable inequality of bargaining power. The mismatch in efficient operating scales serves as a barrier to forward integration by unorganized producers and requires the processor to develop multiple supply sources to enable it to utilize its full capacity. A coordination problem arises since the production schedules for different suppliers must be scattered over time rather than overlap one another.

2.27 A second common set of food production characteristics concerns the yield lag, yield uncertainty, and seasonality of production. The production of most food crops and animal products is dependent upon the life cycle of plants and animals. In some cases (e.g. tree crops; beef cattle), this life cycle involves an extended gestation period before commercial yields are attained. This creates a need for medium-term financing and presents a potentially considerable commercial risk for the producer. Agricultural production is inherently highly risky due to the important influence of weather and the possible incidence of plant diseases or pests. Adverse natural or manmade events can undermine total supply or the supply from one geographical area, resulting in farmer losses, un(der)-utilized marketing and processing facilities, and unmet consumer demand. The seasonality of crop and animal production creates problems for cost-efficient utilization of transport and processing facilities. For perishable commodities, processing requirements may make it necessary to extend planting and harvest activities into more risky production periods.