Idea for New Article

Value Chain Analysis for Improved

Marketing Efficiency

The Case of Regional Agricultural Systems

Edmund W. Schuster

Laboratory for Manufacturing and Productivity

Massachusetts Institute of Technology

Abstract

This article uses a case study from an ongoing research project at MIT on regional agricultural systems, which began in 2008. The objective is to describe a practical situation involving information flows and the corresponding effect on market efficiency.

Essentially, market efficiency is the spread between prices paid to the grower and the retail price for an equivalent amount of the product. If a market is efficient, the spread will exactly equal the cost of marketing services such as storage, transportation, broker fees and other activities. In general, optimal market efficiency means that price adjustments will happen quickly and be transparent to all. This optimizes the allocation of resources.

The current state of affairs is that little or no alignment exists between IT infrastructure for many agribusiness firms and the overall value chain of a smoothly operating market between buyers, sellers, and intermediaries. As such, this represents a classic problem faced by many industries beyond agriculture.

The focus of this study is on intermediaries that acquire an imbalance of power within the value chain. This situation arises because of a lack of information transparency and the perishable nature of agricultural products.

With a deficiency of information, markets in many regions of the US have become suboptimal causing higher cost to consumers and lower prices to growers. While these imbalances can go on for some time unnoticed, changes in energy costs for transportation and the rate of inflation at retail are drawing attention to existing structural market inefficiency for areas like the Eastern Seaboard Region (ESR).

The context for the study is the specialty crop industry. This subsection of agriculture consists of various crops including berries and brambles, ornamentals, wine and grape, tree fruit and nuts, and citrus. Overall, specialty crops represent about one-third of all US agricultural output. Although large in overall volume, the industry consists of many small segments. Sometimes there is geographical concentration as is the case with citrus and grapes.

The outcome of fragmentation and geographical concentration for the specialty crop industry is that some major urban areas of the United States are net importers of fresh fruits and vegetables by wide margins. This is true even though arable land exists to grow specialty crops.

For example the ESR spanning from Virginia to Maine, imports about 65% of vegetables and 80% of the fruits consumed in the region. Further, projections estimate that the ESR will add an additional 6.6 million people to the existing population of 69 million by 2030, creating an even larger megalopolis. Population growth in Boston, New York, Philadelphia, Baltimore, and Washington, D.C. will almost certainly increase the imports of fruits and vegetables from other parts of the U.S. and the world.

The fact that more local food production does not exist for the ESR is a dramatic indication of the lack of market efficiency. It represents a misallocation of resources that will become more apparent under conditions of rising transportation costs and food price inflation. For example in 2008 when petroleum reached $147/barrel, there were reports of California suppliers cutting shipments of strawberries to New England because the increase in transportation cost erased profits.

This article will examine the role of IT infrastructure for regional agribusiness intermediaries in light of the interplay between the value chain and marketing efficiency.