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A Comparative Analysis of Two Hog Firms from Iowa

by 5m Editor
19 December 2005, at 12:00am

By Brent Hueth, Maro Ibarburu, and James Kliebenstein, Iowa State University - The study looks at business organization and coordination of specialty-market hog production using a comparative analysis of two Iowa pork niche-marketing firms. They describe and analyze each firms management of five key organizational challenges: planning and logistics, quality assurance, process verifcation and management of "credence attributes", business structure, and profit sharing.

A Comparative Analysis of Two Firms from Iowa - By Brent Hueth, Maro Ibarburu, and James Kliebenstein, Iowa State University - The study looks at business organization and coordination of specialty-market hog production using a comparative analysis of two Iowa pork niche-marketing firms. They describe and analyze each firms management of five key organizational challenges: planning and logistics, quality assurance, process verifcation and management of "credence attributes", business structure, and profit sharing.

Abstract

Although each firm is engaged in essentially the same activity, there are substantial differences across the two firms in the way production and marketing are coordinated. These differences are partly explained by the relative size and age of each firm, thus highlighting the importance of organizational evolution in agricultural markets, but are also partly the result of a formal organizational separation between marketing and production activities in one of the firms.

Introduction

Markets for specialty, or niche, agricultural products have grown considerably in recent years. Organic produce is perhaps the most prominent example, but markets for so-called "natural foods," and for foods with a regional appellation, have also expanded a great deal (Dimitri and Greene, 2002; Grannis and Thilmany, 2002).

In contrast to other dimensions of the ongoing evolution of agricultural markets, the growth of specialty production is not the result of technical advances and improved agricultural productivity but rather is the result of product differentiation based largely on the use of retro technologies. There has been considerable research on the welfare effects and organizational changes resulting from technical change and the increasing industrialization of agriculture.

Much less has been said about the consequences of agricultural "deindustrialization". We take a step in this direction by comparing the activities of two Iowa pork niche-marketing firms. We focus in particular on the organizational and coordination challenges associated with specialty-market production. The purpose of our analysis is mostly descriptive; however, we also provide normative analysis, indicating where there seem to be opportunities for improved coordination. We frame our comparison around five generic coordination topics. These include planning and logistics, quality assurance, process veri.cation, business organization, and profit sharing. Hog production systems are inherently uncertain (particularly so in "natural" production systems), so arrangements must be made to accommodate unforeseen events and to flexibly and effciently manage the flow of animals from farm to consumer.

Developing a reputation for quality requires consistent production of the set of attributes desired by end consumers, and consistency requires some kind of process for quality assurance. Additionally, specialty markets typically involve provision of one or more "credence" attributes, in which case process verification is important. Finally, business organization and pro.t sharing are somewhat related but also separate in that many forms of profit sharing can be implemented within a given organizational structure. Although not the only possible taxonomy of coordination issues facing specialty producers, this set of topics represents a convenient grouping of issues for comparison across the firms we study.

Related Literature

Our work contributes to a larger literature that addresses various topics within the overarching theme of "specialty markets" in agriculture. One line of research documents the incidence and growth of specialty markets. Dimitri and Greene (2002) document growth in organic foods markets during the 1990's. During this period, retail sales grew 20% or more per year, and certified organic cropland and pasture more than doubled, reaching a total of 2.3 million acres by 2001. Although there are no corresponding aggregate statistics for other forms of specialty production, it is easy to point to examples.1 Kennedy et al. (1997) also note that the term "value-added" has become widely used in agricultural markets and typically refers to some form of branding and product differentiation by farmers.

Although traditional commodity markets will almost surely maintain their overall dominance of agricultural activity, these and other examples seem to point toward a future with an increasing diversity of agricultural food items. Among work that focuses on specific cases of niche marketing, Hayes et al. (2004) document the development of three well-known "farmer owned brands" (a term which they use in reference to both "designation of origin" and "guarantee of production process" branding) and discuss the economics behind these successful branding strategies.

The authors note that supply control is a key feature of successful branding strategies and that, without supply control, successful niche markets quickly become commodity markets. Such has arguably been the case for U.S. organic producers. Buhr (2004) uses three case studies to show how a relatively small pork marketing firm can find a unique niche within a larger, mostly commodity market. Strategies range from specializing in cuts for a particular ethnic minority and season to diversifying across different kinds of sales outlets (wholesale, restaurant, retail direct to consumers).

Other authors have evaluated consumer preferences toward particular niche attributes. For example, Grannis and Thilmany (2002) study the potential market for natural pork in the intermountain west area of the United States. Using contingent value techniques and a mail survey of over 2000 primary grocery shoppers, they find a strong influence of household income and previous consumption of other natural products on mean willingness to pay for natural pork.

They find that with respect to production attributes, feed additives and external effects on the environment are also important explanatory variables. Their results are somewhat ambiguous regarding consumers' valuations of product-of-origin labeling.

Finally, as in this paper, some authors have studied the organization and coordination of niche marketing. For example, Gonz´alez-Diaz et al. (2003) study quality assurance procedures that support branding in Spanish markets for fresh meat and note that geographical indicators and private branding (by individual firms) can be complementary in signaling multiple quality attributes. Brester (1999) presents a case study of a successful niche marketing venture in milling and baking. The case involves full integration by a single large Montana wheat farmer into the provision of milled wheat products for specialty bakers.

In this paper we focus on organization within specialty pork markets. Relative to the literature discussed above, we emphasize the communication, informational, and overall coordination requirements for marketing niche pork. In what follows, we describe the coordination issues facing a typical specialty market producer and then summarize how each of our example firms address these issues. As we will see, there are some similarities but also significant differences in the way coordination is achieved. Additionally, relative to what one might expect, there is much less formality in the contractual mechanisms used by the various parties.

Further Information

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Source: Center for Agricultural and Rural Development, Iowa State University - November 2005

Center for Agricultural and Rural Development