Economic Tidbits

Commoditization vs. Decommoditization

The terms “commoditization” and “decommoditization” are increasingly being used to describe trends in agriculture. Producers will fit into two broad categories: those who produce homogenous commodities like corn, wheat, beef, or soybeans—commoditization; and producers who work through contracts, local markets, and other avenues to produce a commodity with an attribute or quality to more directly supply a consumer demand—decommoditization.

Producers who produce homogenous commodities and market through traditional commercial channels will need to be a low-cost producer to remain economically viable. Producers who choose the alternative will be either marketing directly to consumers or working cooperatively through supply channels to meet consumer demands.

These trends in agriculture came to mind last week when it was announced that Walmart, the nation’s largest grocer, is forming a supply chain directly with ranchers and cattle feeders to ensure a supply of quality Angus beef for its consumers. Walmart says the arrangement is needed so it can meet customer demands for a quality product and transparent supply chain. The beef produced will be all-natural, no-hormones added and will be sold in 500 stores in the Southeast. The Walmart announcement is another example of food industry trend to meet consumer demands to know what’s in their food and how it is produced. The Costco project here in Nebraska is another example.

Consumers will continue to demand greater transparency in how and where their food is produced and will continue to demand specific quality attributes. These trends will present opportunities for producers who are willing explore different ways of producing and marketing their products, willing to work with others in the supply chain to be more transparent, and willing to document to how they produce their crops. Hopefully this alternative can mean greater returns as well.

You may also like