The economics of agriculture, or any sector of the economy, are actually quite simple at their core. A product is produced and someone needs to be willing to purchase that product. What is the key to maximum profit? Connecting the product to the consumer in as few steps as possible.
The process of getting the product to the consumer can be a very complicated process and every step of the way incurs a cost upon the farmer and ultimately their bottom line. Limiting these expenses of distribution are the key to producing maximum profit in agriculture. The USDA’s Yearbook of the Department of Agriculture, 1909 talks about this very issue:
The costs of marketing farm produce include expenses incurred in hauling from the farm, freight, commission for selling, storage, insurance. To these may be added the losses due not only to deterioration of products after they leave the farm, but also to unequal distribution of shipments resulting in overstocked markets.Yearbook of the Department of Agriculture, 1909, p. 161
The farmer has always had a disdain for the middlemen because, despite their ability to connect the farmer’s product to consumers, they cut into the farmer’s profits substantially. How to prevent this? Sell directly to the consumer. It eliminates the middleman, which often benefits both the producers, who make more profit, and the consumers, who spend less on the product.
For centuries farmers have done just that, creating business models that connect them directly to the consumer.
- The dairy farmer builds a small cheese factory and sells a premium cheese product directly to the consumer at the factory and directly to stores.
- In community-supported agriculture (CSA), the consumer buys directly from the farmer, paying an upfront fee and getting fresh produce weekly from the farm.
- The farmer pays a small fee to sell at a local farmer’s market and sells directly to the consumer.
Bigger companies maximize their profits by using vertical integration in which they own not only the production facility, but also every step of its distribution, cutting out the middleman by owning that role. Other companies work directly with the farmers and agree to provide a market for their product and cut costs by buying from the farmer rather than a distributer.
The key to maximizing profits is connecting to a market as directly as possible. When a farmer is able to find and develop a niche market and then connect directly with that consumer, sustainable profits are sure to follow. Direct-to-consumer sales free the producer from feeling tied down by merchants. However, it requires significant business skills outside of just knowing how to produce a crop.