November 2011 Archive

Learning about crop insurance is like taking medicine. It’s good for you, but it doesn’t always go down easy. Luckily you have good writers at Grist.org to explain it.

It’s a great piece, but it overlooks an important part of the crop insurance debate. Crop insurance can be purchased to protect farmers from a wide variety of risks. The Risk Management Agency has policies which cover economic losses due to price fluctuations as well as crop losses due to meteorological catastrophe. Farmers can insure against falling crop prices if a market becomes glutted for a certain product just as they can insure against hail, floods, drought, and the Four Horsemen.

The shift in emphasis from payment programs to crop insurance programs as a means to regularize farm income and has a distinct and practical advantage. Economic loss and crop loss can be more accurately and efficiently calculated by professional actuaries using market forces like price and supply. Subsidies are largely calculated at 5 -6 year intervals by Congress. A more comprehensive crop insurance program encompassing both economic loss and crop destruction is likely to be a more responsive and efficient tool for protecting farmers.

Well done anyway, Grist.

I cannot help but notice that food standards for quality assurance are mainstream news all of a sudden.

Back in October, the Boston Globe did an awesome hit-piece on fish fraud, the practice of intentionally mislabeling filets as rare and exotic species when in fact they are Vietnamese farm-raised tilapia or some such.

It took slightly longer than a month for the fishing industry to begin to implement an international system that will prevent future fish fraud. The system will use a new DNA technology to assure customers they are finally getting what they paid for.

In non-fish news, last week’s CBS Sunday Morning covered the California olive oil industry’s attempt to differentiate itself from European imports which intentionally mislabel their biodiesel as “extra virgin” olive oil. California olive growers had to finance their own hit-piece exposing the rampant practice of olive oil mislabeling a few years back, but they successfully used the newly publicized fraud as an opportunity to organize around their own quality standard.

I know the danger of seeing trends in a few unrelated cases. It would seem, though, that provenance and quality control are becoming more important motives for consumers in general, not just for food snobs. Note that none of these stories appeared in a trade publication or a niche-periodical. It doesn’t get more mainstream than CBS Sunday Morning. The fish-fraud expose appeared in the business section of the Boston Globe, not the food section. The story about the group of fishing industry geeks and the new DNA barcoding gadget came from the Associated Press, Canberra, Australia.  News about quality assurance standards for good food is news for everybody now. I dig it.

Contrast these two recent articles, both discussing the business implications of small farms and local food.

The first is that the market for locally grown products is expanding, rapidly. That’s wonderful news for my friends and clients. This is more reassurance that this is not a fad, but a permanent part of our culture. While the dollar signs are great news, to me the subtext is more important. This economic success means that the ad hoc supply chains local farmers have established to get their products to the customer are working.  If almost $5 B has changed hands in this ad-hoc system, that is a promising sign of permanence.

Secondly, both the NYT and NPR recently ran the EXCLUSIVE STORY that it is tough to raise capital for a farming enterprise. I know, I was totally blown away too.

Would this story be at all interesting if it were about the entry costs of a private dentistry practice? Of course you would be bored to tears reading about that in the Times. It’s not interesting because the reader already assumes it’s expensive. Why do we not think it is just as tough to get into farming?

The perception that it is easy to get into farming is unfortunate. There is a naive assumption out there that a farmer is someone who just puts some seeds in the ground and tickles them occasionally with a hoe until perfectly formed organic carrots spring forth. Farming, especially in America, is a highly diversified, sophisticated industry. We actually have very good farmers here and the most successful ones treat their “farm” as a professional enterprise. It should never be a shock for any business to have to fight for capital. A Times article this patronizing only feeds the presumption that farming is for hicks.

More broadly, it is time for the neophyte farmer to replace their zeal with the steady realization that farming is hard physically, logistically and financially. Small farms and local food have already had their Thomas Payne Moment, courtesy of Messrs. Pollan and Schlosser, et al. It is now time to conduct the boring administrative details in order to consolidate the gains made by the pioneers. That means scaled-down logistics, food lawyers, ag economists, accountants, local and farm-friendly commercial lenders, and all that clerical stuff. This is the real infrastructure of an alternative food system that will not go away as a fad but will continue to make its market participants lots and lots of money. It’s evolution, not revolution.

I encourage any growers among my readership to share their tips or anecdotes on raising capital in the comments box, especially how you overcame the business challenges.

For some great lessons about using the law to protect a food or beverage business, check out this HuffPo piece about a lawsuit between Boston Beer Company (The Sam Adams guys) and one of my favorite beers of all time, Anchor Steam. In sum: Key employee is raised from a pup by the Sam Adams Machine. Key employee signs employment contract containing superbly drafted confidentiality and non-compete clauses. Key employee leaves Machine for arch-rival. Machine ruins everybody’s day with (successful?) lawsuit.

You can never ever have too much IP in the food business. The only way to keep something like a recipe secret is through confidentiality clauses in employment contracts with employees. Non-compete clauses will also ensure that the employees you trained will not pull-stakes to work for your mortal enemy, or start up a competing endeavor on their own. Boston Beer seemed to understand this perfectly well. Either they learned the hard way by getting burned or they had the foresight to make this part of their long term human resources strategy. Brilliant. This kind of strategic planning, using just a few simple legal documents, puts Sam Adams in a great position going into the fight. It also gives them huge bargaining power in the settlement negotiations that are sure to come. All it cost them was a few hundred bucks they spent on having the right legal documents drafted ahead of time.

Incidentally, I can understand why Boston Beer sued the former employee – because the employee violated a contract into which he voluntarily entered. That is what lawyers call privity, the binding relationship between parties created by mutual promises. But Anchor Steam has no such privity with Boston Beer. Their complaint must be based in some other cause of action under state law, such as unfair competition perhaps. If so, that part of the suit sounds like a loser for Sam Adams. Confidentiality and non-compete clauses may help you smash your wayward former employees, but there is not much they can do against your competitors.

ThinkProgress.org has the latest news on the urban farming phenomenon in Oakland, California. While it is great to see people so heavily engaged in eating good food, this is not the kind of change I hope to see in the food system. It lacks permanence: zoning authorities can give and atake on a whim. I would prefer to see city council members burning their political capital on a micro-scale slaughter facility within city limits or some other piece of noisy, stinky, critical infrastructure. It’s much harder for cities to change their minds on something once bricks have been laid down, long term loans have been authorized, and a few dozen jobs are at stake.

Backyard farming should underscore two important points for those who eat and for those who grow. It shows that there is a.) a consumer demand for local products – duh – and b.) a dearth of supply so critical that it motivates consumers to undertake the difficult practice of farming for themselves.

Consider a world where this happened in economic transactions other than farming. Imagine if everyone had to learn how to fill their own cavities because they didn’t have access to a dentist. Imagine if everyone installed a lift in the garage to maintain and repair their own vehicle because there were no mechanics around. Farming is a skill, especially when it comes to the humane and efficient slaughter of livestock. I applaud those willing to do it themselves, but learning to farm proficiently requires an investment of time and resources commensurate with any other profession.

Part of the problem is the mis-regulation of the food industry. Compliance costs push small producers right out of the market. The second most pervasive problem is a function of the first; inflexibility of scale. There is zero infrastructure in places like Oakland which can process locally produced products. Not incidentally, the lack of infrastructure is the part that takes the longest to remedy. A zoning change can occur overnight. A flour mill or a slaughter facility takes much longer and requires a real long-term business and organizational strategy to achieve success.

Backyard farming is a beacon fire for entrepreneurs. I don’t know if you’ve notices but food is kind of a big deal lately. To see the American economic model react so slowly to consumer demand is shocking and a bit depressing. If do-it-yourself farming is a viable option for people who want to eat differently, it is a sign that many producers are still systemically incapable of meeting demand. The good news is that if you are a producer, there are still plenty of consumers out there for alternative agricultural products, and lots of money to be made if you take the long view.

Milk is such a seemingly simple, ubiquitous product. Consumers hardly think that its production entails so much hard work for so little economic certainty. Barry Easterbrook has a great article about the US dairy industry which is now appearing in Gastronomica. It’s perfect for a lengthy weekend read, especially if you want to learn about how our food system completely overcomplicates production and pricing. Sometimes the results are unfortunate for individual producers. For the food law geeks, if you read between the lines of the article, there is some good stuff in there about how the massive domestic milk cartel, Cooperatives Working Together, does its thing.

CWT is an agricultural cooperative, in the news lately as the defendant in a substantial antitrust class-action suit. The Easterbrook article gives you a better insight into CWT’s price manipulation tactics and supply controls which the class action suit found to be so objectionable.

CWT exploits the Capper-Volstead Act to exempt its price fixing and market manipulation practices among is dairy members. The Act ordinarily exempts agricultural cooperatives from anti-trust laws. Agricultural cooperatives qualify for the exemption only under limited conditions. The most important condition, and the one most often overlooked and violated, is that all cooperative members must also be producers of agricultural commodities in order to qualify for the exemptions.  Once these conditions have been met, members have some, but not unlimited, ability to coordinate sales, marketing and pricing activities. The recent lawsuit alleges that CWT violated this rule by admitting members who were not producers, such as marketing organizations, distribution groups, and other trade organizations.

By their own very public admission, CWT’s programs successfully mitigated the price fluctuations which make dairy farming such a difficult and risky enterprise. They did it in part by making your milk more expensive. Whether or not they blew their Capper-Volstead exemption is another story.

The Easterbrook article and the recent lawsuit are nice tie-ins. Commodity production turns farmers into price-takers, an unenviable position in which to be considering how susceptible producers are to price fluctuation. Non-farmers can hardly imagine what a hard life that must be. It is perfectly understandable how an organization like CWT would push the limits of food law to mitigate the financial risks of its membership.

Yet there is another way for dairy farmers to achieve price stability. Changing consumer demand has allowed for organizations like Hudson Valley Fresh to opt out of the commodity production system altogether. Their milk is not anonymously co-mingled into a great big tank.Hudson Valley Fresh members have successfully de-comoditised their milk by taking a more active role marketing and distributing their own product. This involves a far less risky business and legal strategy because their success does not depend on pushing the limits of anti-trust law. They made their own discreet pipeline for milk which conforms to separate production guidelines, so they have more say over the destiny and price of their product. Think small.

If you are an agricultural producer looking to secure a long term arrangement with a local outlet, this is the customer you want. A school district will buy in massive volume according to a predictable schedule, will accept delivery for the duration of the contract, and the check will never bounce. This is a big win for the kiddos, who get to eat real chicken for a change instead of spongey star-nuggets. It is also a huge win for the farmer and a great business deal.

The Denver Post makes an excellent point about food-safety auditors. They often do a cursory job when certifying food production facilities and routinely ignore risks that should set off alarm bells. The Post reports that a food safety audit of Jensen Farms gave its facility a “superior” rating the very same month that listeria-contaminated cantaloupes were processed for shipping. While farmers alone face an array of meteorological and financial risks, they share with food processors the risk of causing food-borne illness. I am a big fan of risk management for anyone in the food business. The existence of strict liability in civil suits for food-borne illness makes the stakes too high – farmers and food businesses can never be too careful.

Food growers and food processors always use an agricultural or production process to control the growth and spread of pathogens. Farmers can implement Good Agricultural Practices to limit pathogen contamination at the sites of production and distribution. Food processors can create modern HACCP plans to maintain the safety of the products they package and serve. Either of these critical risk management steps requires physical or procedural measures to be taken in the field or facility where food is grown or produced.

It seems, however, that physical remedies like these are not 100% effective. The pathogens tend to somehow always get through, either because they are hardy and invidious like E. coli 0157:H7, or because of the lousy inspections and audits like the ones in the Post article. Implement the prophylactic measures anyway, and follow them as vigorously as you can. Have a zero-defect mentality. You will otherwise never be able to sleep at night in case you caused a tragic illness. These measures are also the best defense against dangerous pathogens.

Supplement these measures with a legal risk management plan to mitigate the financial risks should your best intentions fall short. A carefully organized corporate structure can limit the ability of creditors and judgment holders to secure the personal property of the farmer or food business owner. Producers and food entrepreneurs can also pass liabilities up and down the supply chain by contractual agreement at points of sale. Whether you are the buyer or seller of a farm product or a processed food, alleviating yourself of the risk is something to consider in the bargaining process. Finally, third parties like insurance companies can be paid outright to assume the financial risks of food borne illness. These financial arrangements require thorough drafting and review to ensure that the amount of insurance purchased meets the needs of the business based on the amount of the typical money judgment in that jurisdiction.

The bugs will find a way to get through. Part of your strategy should be to use a good independent inspector or auditor, not the chumps in the Post. Assume the moral responsibility to put out a safe product, yet always be otherwise prepared in case those efforts fail.