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The Changing Face of the U.S. Grain System: Differentiation
and Identity Preservation Trends
Aziz Elbehri
Economic Research Report No. (ERR-35), February 2007
The U.S. grain system is increasingly marked by product differentiation
and market segmentation. More specialty crops now require either
some form of segregation or full-scale identity preservation
to keep them separate from conventional commodities. Market
segmentation within the grain system is driven by the need to
preserve its market value, or ensure purity of the product.
Internationally, U.S. grain markets must increasingly conform
to a new regulatory environment reliant on traceability and
identity preservation.
What Is the Issue?
Differentiated grain markets differ markedly from those for
commodity grains. The commodity market is characterized by minimum
common standards, a large number of buyers and sellers, and
high flexibility. Price is the primary coordination mechanism,
with commodity exchanges often the locus of price discovery.
Pricing is with reference to standard grades (e.g., number 2
yellow corn) that are broadly accepted, enhancing market fluidity.
By contrast, differentiated grain markets have fewer buyers
and sellers, higher costs for segregation or full-scale identity
preservation, and specific quality standards, compounded by
higher risks in production and marketing. Differentiated grains
usually command price premiums, based on the extra costs incurred
by producers and shippers and willingness to pay at the processing
or retail level. This report examines the economics of grain
differentiation, including the cost implications of different
protocols, the unique risk factors of adopting IP (identity
preservation) grains, the use of contracts, and the role of
government as a provider of market information and facilitator
of product-differentiated markets.
What Did the Study Find?
To preserve the identity of a specialty crop, segregation from
commodity grains or oilseeds is required. In some cases, this
is necessary to protect purity and to preserve the value of
the specialty crop. In other cases, the goal is to prevent contamination
through accidental commingling (for example, biotech or not),
or to protect products that are approved only for certain uses
(for example, industrial use only).
The cost structure for IP grains differs with the degree of
segregation and/or IP required. For highvalue grains, costs
encompass both segregation and identity preservation in the
supply chain, and the costs to mitigate risks specific to IP
grain markets. Volume shipped, shipping method, tolerance levels,
testing, and documentation requirements can influence segregation
costs.
Costs associated with risk mitigation depend on the type of
specialty crop as well as the purity level. Lack of compliance
with a product specification can lead either to a price discount
or rejection of a shipment by buyers.
Price setting under an IP grain system is characterized by
premiums or discounts relative to standard commodities, whether
or not production and marketing is under contract. Premiums
are affected by various factors, including the proximity of
suppliers to buyers and the cost and availability of substitutes.
For many trait-specific crops, price premiums rise or fall depending
on supply conditions for the generic commodity.
Differentiated grains require more coordination between growers
and handlers or processors, and more sharing of information.
This arises from the trait-specific quality attributes of IP
grains: within the supply chain, information must be conveyed
about raw materials, key ingredients, and production/manufacturing
processes. Assurance of product quality and authentication of
process/product claims is often required. Farm product suppliers
(for example, seed producers) must demonstrate that product
attributes are verifiable and show supporting documentation.
Production contracts are important for trait-specific grain
to ensure that the attribute-specific commodity is delivered
and that predetermined management practices are used. For the
producer, contracts can ensure a return adequate to cover costs
of identity preservation and any yield drag associated with
trait-specific varieties. Contracts can also ensure that there
is a market for a niche product.
Production and marketing of trait-specific grains involves
risks associated with price, quality, and information. Testing
and documentation bring greater transparency to the transactions
(in terms of quality and production processes), but the loss
of anonymity also exposes producers and handlers to new risks.
Farmers’ management ability can affect both yield performance
and proficiency with contracts and relationships. On the buyer
side, contracts help meet the demand for specific product qualities,
improve cost efficiencies of product processing, and reduce
transaction costs.
Risks are typically higher for specialty crops than for generic
crops. Non-GM crops subjected to testing run the risk of rejection.
Organic grain can be accidentally contaminated. Pharmaceutical
crops are not licensed for food/feed use, so risk of contact
with the food supply can make their handling far more costly.
Sophisticated risk management practices are required to minimize
the chance of potential gene outflow. This entails a closed-loop
system with rigorous quality control and a tight chain of custody.
Increasing grain differentiation in the U.S. food and feed
industry may put new demands on government, but it is not clear
whether USDA’s traditional roles in commodity markets
should be extended to specialty grains. The collecting of price
information for commodities is not easily extended to specialty
grains, which are heterogeneous, small in scale, and locally
concentrated. Moreover, price information can be proprietary,
established through private supplierbuyer contracts. Likewise,
USDA-approved grades for specialty grains may not be justified
since desired traits are idiosyncratic.
As differentiated grain markets expand, the U.S. grain industry
faces new demands for identity preservation, segregation, and
product tracing. This will require adaptations in grain production
and handling, closer market coordination, more extensive information
systems, new risk management tools, a better understanding of
costs, and more thirdparty services for auditing, verification,
and quality assurance.
How Was the Project Conducted?
The project was based on an extensive analysis of the literature
covering industry case studies, academic research, and government
documents. Key findings—especially those relating to farm
risk management, cost of segregation, and IP market dynamics—are
drawn directly from analyses conducted at the Economic Research
Service with outside collaborators.
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