Disintermediation: The Future of Fewer Middlemen
In economics, disintermediation is the removal of intermediaries in a supply chain, or cutting out the middleman. Instead of going through traditional distribution channels, you now deal directly with customers or suppliers.
The Internet has facilitated this change. Think about the millions of airplane tickets bought online directly from the airlines. Amazon.com is a one-step intermediary; eBay facilitates direct transactions without intermediaries. These developments have already impacted your farm. More are coming.
Disintermediation goes two ways: Downstream to consumers and upstream to input suppliers.
In the old days of doing business, supply chains could be very long. They still are in some specific cases. The Economist magazine recently described in colorful and aromatic detail the “Journey of an Indian Onion.” It goes from a small farmer’s field to the end customer in Mumbai in a few days, through five middlemen and four rounds of loading, sorting, and repacking. Up to a third of all onions are wasted from damage or weight loss.
In the U.S. and most of the developed world, our farm supply chains are not as long. There are commonly two intermediaries between you and consumers: a packer and a supermarket. For example, most apples are grown by the packer and sold to the supermarket (one intermediary). Walmart has a declared strategy to become the single intermediary for vegetables and fruit between growers and consumers.
Other less-obvious farm value chains have successfully gone through disintermediation. If you grow a seed crop, it is a direct sale from you to the seed company, without intermediary. Most contract production is direct, farmer to end-user, such as corn-to-ethanol or corn-to-feedlot transactions.
On the other hand, soybeans-to-export transactions usually involve several intermediaries: domestic buyer, exporter, foreign buyer, foreign processor, foreign retailer.
Farmers with greenhouse crops usually have direct sales or perhaps one intermediary. A grower in Taylorville, Illinois, produces Asian vegetables and delivers directly to ethnic supermarkets in Chicago. A family of growers in Millstadt, Illinois, grows ornamental plants and sells to Home Depot, Lowe’s, and nurseries around St. Louis. That’s one intermediary from farm to consumer. If ornamentals had to come from California, it would add multiple intermediaries.
All farmers – always and everywhere in the world – dream of cutting out the middleman. Few succeed. Many farm inputs have important information, arbitrage, and service aspects that favor well-structured professional intermediaries. When the wholesale and retail levels consolidate in huge regional and national chains, it seems the goalposts have moved again.
As you think about your future, know that the tables are turning in favor of disintermediation. Information can now more readily be acquired through consultants and the Internet. Sales and purchases can be consummated securely online. Your farm may have now grown to a size that, just a few years ago, was associated with a dealer.
Here are six points to ponder as you disintermediate your farm.
• Size. This is important for bulk commodities, much less so in specialized products. For instance, are we talking about trainloads or truckloads of corn? Or is it a 20-pound package of steaks that UPS can deliver by 10 a.m. tomorrow morning?
• Capital. It’s needed for storage, logistics (trucks and storage bins), and insurance. In the old system, intermediaries provided much of it.
• Structure. It needs to fit the processes of a distant supplier. In the past, you met local suppliers in the coffee shop. Deadlines are different now; contracts are more formal.
• Cooperation. Suppliers and buyers share your interest to reduce the distribution costs. Disintermediation appeals to everybody.
• Initiative. Sell your farm’s capabilities to suppliers and buyers. They aren’t waiting for you, and they may not know you qualify as a direct partner. Actually, you might upset a cautiously crafted balance. Good outcomes don’t always come easily.
• Follow-up. Quality, volume control, and fiscal accountability are no longer responsibilities of the intermediary. They’re yours. Selling your abilities is constant. They’ll never stop evaluating your ability to deliver.
Think about the poultry industry. Companies downstream integrated it, so they now produce the things they used to buy. That farm business trend isn’t going away.
Similarly, companies upstream from you might want to get closer to the consumer. Think of a seed company that wants to maintain ownership of the traits and branded germplasm down to the processor and even the retailer.
At some point, you may see yourself as a contractor of farm operations. One such business model is similar to a franchising system found in chain restaurants. You don’t own the store or the product, but you benefit from its good name and the partnership. Could such an arrangement redefine agricultural value chains? You’ll have to decide where your farm fits in the future.
Your Farm in the Future
This is a year-long special project of Successful Farming magazine that attempts to envision the future of agriculture and help producers see their role in shaping it today. Sponsored by: Asgrow & Dekalb
By Mark Vanacht