Ginder, Roger

ISU Economics Department Publication, April 1999

Most farmers are well aware of the production and price risks associated with growing standard corn and soybeans. But there are emerging markets for specialty grains which generally offer premium prices. The trade-off for those premiums may be the need to use different risk management practices and strategies. The current U.S. marketing system for corn and soybeans has been built around an undifferentiated bulk commodity concept with product moving through the channel in response to open market transactions. But the value of specific traits to the end user are less accurately priced. And as commodities with different physical or chemical traits are commingled, much of the differentiated value in those traits to specific end users is lost. But increased consistency in raw product has become more valuable to some intermediate processors and end users. As improved genetics have permitted specific traits to be produced with smaller yield penalties, there are more and more cases where the benefits from identity preservation may exceed cost savings gained from bulk handling logistics. Producing and marketing identity preserved products with specific traits requires greater coordination and a more formal means of information exchange than producing and marketing bulk commodity products. Genetics, production practices, harvesting, handling, storage and processing must be more closely coordinated if the desired traits are to be preserved for the end users. The use of contracts among the firms in the market channel is one means to obtain the required coordination. In many ways, contracts reduce the level of risk by clearly stating the responsibility of the producer and the contractor. However there are different types of risks associated with production under a contract and producers need to be aware of these.