Foresight for Successful Cropping Systems:
Identity Preserved Production Opportunities: Understanding Costs and Risks

By Zachary Fore
U of M Extension Cropping Systems Specialist
forex002@umn.edu

You have heard the term, read about it, maybe even produced identity-preserved (IP) crops under contract.  If you haven’t produced IP crops under contract, it is highly likely that you will in the future. The attraction of IP to the grower is improved profit through price premiums.  However, there are many factors to consider in determining if the price premiums exceed the costs and risks associated with growing crops under an IP contract.

Why all the interest in IP? 
Rapid and fundamental changes are taking place in the agriculture and the food industry. These changes are being driven by three main factors:

1. Changes in consumer preferences:

•  Increased demand for variety, quality, convenience, and consistency.

•  Concerns about food safety.

•  Increased demand for healthier, more nutritious foods.

•  Growth in the demand for organic foods.

•  Demand for environmentally friendly food production systems.

2. The drive by processors to reduce costs by continuously improving process efficiencies.

3. Rapid development of new consumer products in the food marketplace.

Many of these things are not new.  Why, then do we see rapid and fundamental changes occurring? Primarily because these factors can now be addressed, due to new enabling technologies, systems, and conditions:

1. Enabling technologies:

•  Specific input and output trait development

•  Biotechnology

•  Research and analytical technology

•  Information technology

2. Enabling systems:

•  Identity preservation

•  Certification

•  Trace-ability

3. Enabling conditions:

•  Prosperity – consumers are able to pay a higher price for the products they desire

These changes and trends create the need to segregate grains that have special characteristics.   Currently, these changes and trends are in their infancy. As they develop, there will be more and more opportunities to produce IP crops for premium prices.

Analyzing IP Opportunities
IP opportunities will come in many shapes and sizes. Each opportunity will have to be analyzed separately to determine if it fits in your production system and will improve your profitability.  There are direct costs, indirect costs, and risks – which will vary with each producer.

Following is a guideline to help you assess the costs and risks of an IP opportunity to ensure that a production premium will result in an increase in your bottom line.  The source of much of this material is: “The Real Cost of Identity Preservation in the Grain Production and Distribution System,” by C. Phillip Baumel, Iowa State University; and Marty J. McVey, AGRI Industries, West Des Moines, Iowa.

Planning Costs
The first on-farm cost is the time involved in deciding if and how to grow an IP crop. This planning process includes:

•  Negotiating with a contractor or buyer of the crop.

•  Negotiating a complete production program including acres, buffer zones to reduce or eliminate pollen drift, inputs, production, management, planting, spraying, harvesting, storage, and delivery terms.

•  Negotiating premium and penalties for meeting or failing to comply with contract terms.

•  Analyzing and thoroughly understanding the terms of the contract.

•  Assessing the reliability and credibility of the buyer.

Direct Costs
Table 1 describes the steps involved in cleaning the equipment and storage facilities to remove all materials that could contaminate IP grain. The cost of time should include the cost of labor, as well as the cost of having the machine idle while the cleaning process is conducted.  Your actual time will vary depending on size and type of equipment.  Use your own estimates whenever possible.

Depending on the contract specifications, other direct costs may include:

•  Increased seed cost.

•  Conditioning, packaging, storing.

•  Lab, testing, and certification fees.

•  Changes in pest management/chemical costs.

Table 1. Steps involved in cleaning and purging on-farm equipment and storage facilities. Activity Cost Item Estimated Time Planting Clean planter boxes. Time depends on size of planter For a 16-row planter.. 3.2 Hours Harvest Clean and flush each combine. Clean and flush auger of each wagon Clean each truck Clean each storage bin 1.3 Hours 0.3 Hours 0.2 Hours 1.0 Hours Delivery Clean and flush auger Flush each auger Clean each truck 0.2 Hours 0.2 Hours 0.2 Hours   Total cleaning time 6.6 Hours

Risks and Indirect Costs
Farmers also incur several risks and indirect costs including:

•  Yield loss experienced due to growing specific varieties compared to others you might choose to grow. 

•  Lost premium on IP grain used to flush combine, augers and auger wagons. This can amount to 60-75 bushels per type of IP grain. This would be a direct cost if the production contract’s volume terms were in bushels rather than acres.

•  Possible risk that some IP grain would be rejected because of contamination or undesirable physical characteristic of the grain. In the former case, the entire premium would be lost. Moreover, the producer may incur added freight costs from returning the grain to the farm or redirecting the IP grain to a local commodity market. In the latter case, the producer may also face an opportunity cost if he is forced to dump the IP grain in the local commodity market after the best marketing opportunities have been realized.

•  Opportunity cost of basis improvement for grain delivered at harvest or buyer’s call.

•  Under buyer’s call, the elevator cannot issue a warehouse receipt. This will then reduce liquidity of the producer, because farmers cannot get a government loan without a warehouse receipt.

•  Cost of providing a buffer zone to reduce or eliminate pollen drift for pollinating crops such as corn.

Summary
IP crop production has the potential to significantly improve profitability for farmers. However, farmers may incur substantial costs and risks in growing IP crops. The direct costs per bushel vary with the size of equipment and the number of bushels grown. The indirect costs are difficult to estimate, because they vary on a case-by-case basis. The risk from indirect costs is likely to be larger than from direct costs.

Contracting can reduce many of the risks producers will face in growing IP crops. Therefore, it is critical that producers understand the contract terms. If you enter into a contract blindly, you face the potential risk of growing an IP crop and losing money for all your efforts.

Links to Production Contracts
“A Guide to Agricultural Production Contracting in Minnesota,” sponsored by the Minnesota Department of Agriculture, can be found on the Internet at www.mda.state.mn.us/commissioner/contractinfo/manual.pdf.  Copies can also be obtained by calling 1-800-967-2474.

Basics on specialty crop contracts from the NDSU Extension Service can be found online at www.ag.ndsu.nodak.edu/aginfo/cropmkt/pubs/spcontractsHO.pdf

The Iowa Attorney General has assembled a list of production contracts on its web site: www.state.ia.us/government/ag/agcontracts/index.html. The list includes hog production and marketing contracts, cattle production and marketing contracts, poultry contracts, and corn and soybean production contracts.