ETHICS IN MARKETING
by Richard Alan Miller ©2002
The most common problem with beginning farmers is their security in the sale of a new crop. As a result, many go out to prospective markets and ask what they are willing to buy. Most large buyers do not like to be bothered, with less than ten percent of the inquiries even attempting to grow something that year. It is recommended that you do not bother a buyer until you have something to show him from your first year’s production. There is no substitute for proof of production.
If the buyer likes what he sees, he will usually want to buy it on the spot. Most wholesale buyers purchase their needs on a spot basis, like most other commodities. The buyer does not need to know that you have only limited production (2 acres), just show him what is available. The key is to secure a contract each year to meet your cash-flow requirements for the projected expansion program. Whatever else you do, please remember not to attempt rapid growth. That is how agriculture got into this current problem in the first place.
There is always lead-time in closing a sale. Most of the larger buyers must secure more than 200 products, each from at least five to ten sources. My approach is to send a one-page description of my crop, including terms-of-sale, with a small sample attached. If they like the price, terms, and small sample, they will then ask for a larger sample, usually 2 pounds or more. Some crops may take as long as six months before a sale. This is normal, for a number of reasons.
There are situations where even though your product is better and cheaper, they buyer will not commit to a purchase. Why? One reason might be trade. There are some companies that sell products to a foreign country. Since they do not want to be paid in the currency of the country, they take a trade in on their commodities, usually a spice or drug plant. The actual spices and drugs traded for another interesting story for another time.
Chapter 9 on Bulk Marketing from THE POTENTIAL OF HERBS AS A CASH CROP should be thoroughly reviewed, especially the graph on page 159. What this indicates is that often crops are harvested at the very time most buyers are at their lowest cash-flow period. This means that they are not in a position to buy crops when they first become available. The small farmer should attempt contracts for future productions. This gives both the farmer and the buyer security.
All first attempts on herb and spice farming should be seen as speculation. With this perspective and approach, there should be no expectations, either on production or marketing. Your primary purpose is as a feasibility study toward more lucrative crops. The key is to enter marketing slowly. Most expansion programs show a 2-acre production on a given crop for three years, expanding into 10 to 20 acres with six years. With 6 to 8 crops in a similar production, marketing securities are established.
Spirituality is often defined as not so much what you do, but rather, how you did it. The quality of the experience is always based on the deeper aspects of your involvement. So, one of the first questions that should be asked is, “why am I doing this (farming herbs)?” What is your purpose? To make a lot of quick money, or as a lifestyle different that that found in a city?
As with most other aspects of farming, marketing offers options or choices, several ways something can be sold. The ethics involved in these choices are not often clear, nor are they labeled “right” and “wrong” ways of doing business. More often, they are convoluted and difficult to choose. The first options the new farmer must face in marketing is how to fairly price his crop efforts.
In the first stages of marketing, these options are usually grouped into the following two types of approach. They are either
1. “what the market will bear,”
2. “fair-wage profit margin.”
The former, while giving the farmer maximum incomes from sales in a given year, also encourages surpluses (or over-production), and then shortages. This puts the crop into the hands of bankers, not those doing the work. Let’s look at an example from recent years, like the Ginseng production in North America.
In previous years, a number of farm communities established expensive lathe-housing facilities throughout the Mid-West, including Wisconsin, Illinois, and Missouri. Over the years, the markets prices became stable, with an annual growth rate of twelve percent production. At that time, the average farm was about 20 to 40 acres.
Then, several years ago, several large investors put more than 2,000 acres into cultivation in the Okanogans of British Columbia. The large extra volumes in production (as surpluses) dropped the price to below production costs, and many Wisconsin farms had to close down. They were unable to take the large swings downward in price, due to availability from bank storage houses investing on this new agriculture as a storable commodity on the Vancouver Stock Exchange.
This, by the way, is also going to happen to Echinacea purpurea, with the large cultivations in Saskatchewan. This was the response tobacco farmers took when offered a tax incentive for switching from tobacco subsidized productions in that region. This type of production does not offer any security to the small farm, and their preferred rural lifestyle.
When looking at “fair-wage profit margins,” production is now limited to what the market demands. While it is true that many of these products increase their markets with availability, it is also true that the actual production then become much more competitive. If the markets are limited to niches and small-growth increases, then a small farm can possibly survive and continue, as long as they also diversify.
By selling at a fair wage increase, this limits those willing to try and compete. The actual growth is then dictated by the market demand, with small to modest increases each year. This tends to stabilize production, encouraging upgrades in technology, and maintain a price which becomes able to compete with International markets.
Let’s take an example of how a buyer might “contaminate” a grower. Catnip is a good example, with limited growth projections as a pet toy ingredient. Farming alfalfa with irrigation yields most farms about 4 to 5 ton per acres, prices varying from $60 to $120/ton. Catnip, in the third year on the other hand, will yield between 3 and 4 ton, with the same irrigation and machinery needs.
Catnip markets in Singapore for $0.85/lb., or more than $170/ton. Now, enter a small user as a buyer, someone who would purchase less than 20 acres. His needs are for a C/S and TBC cut for the limited distribution as a tea ingredient in a Regional market. His annual use is about 20 ton, so he is able to offer the grower up to $1.30/lb., or almost twice the current International market.
What happens next is that the farmer accepts this price the first year, while that tea manufacturer or Regional wholesaler now tries to find other competitive growers. More new growers enter the market thinking, “I can grow this for $1.10/lb., and still show excellent profit margins.” Where does the farm that originally sold his product now sell it for $1.30/lb.?
In fact, he may not be able to sell his crop at all now because who else needs it? His crop now becomes are surplus for this market. And, how can he compete with the International markets, with prices much less than he ever planned. This form of contamination is especially true for the smaller end user, making tinctures or other medicinal type preparations.
They are willing to pay much more for smaller volumes. But then, where do the other six or ten growers market their effort with this crop? By selling at a fair wage not only discourages new competitive growers, but it also stabilizes the total volumes grown. Both have far-reaching effects on the rural grower. His first choices often affect the eventual outcome of that crop’s market.
Often, larger companies will attempt to enter a new product line by controlling the inventory volumes. This is a true story about Hemlock Cones. A specific High School needed insurance and transportation expenses for their athletic programs. In order to do this, the teams when out each year and harvested Hemlock Cones for several specific manufacturers.
Each year, for the next six years, this school received contracts for annual needs, including modest growth in their production, and annual price increases. In the seventh year, a new business decided it wanted to enter into competition with this limited, but established market. They hired a number of migrant laborers, who over-harvested the Hemlock groves, and left them depleted for the next six years.
This company, also in the process, developed a large inventory of Hemlock Cone. While the High School students sold their cone for $1.80/lb., now some of the larger Regional buyers could inventory this specialty cone at $1.50/lb., offered by this new company But, because this was a specialty cone, most buyers held back, and did not purchase during the normal periods. As a result, the new business panicked, decided to cut their losses, and offered the cone at a loss for $0.90/lb.
This set up false expectations on what a Regional Wholesaler should pay for this cone, and for the next three years, this cone was no longer able to be marketed at any price. Why? The cone could never be produced for $0.90/lb., and there was now difficulty in harvesting even at the $1.80/lb. price, because the region was depleted.
What happened next is history. The markets moved on to other specialty cones, and Hemlock was no longer in demand, or even available. As a result of the greed of the new business, this product is no longer marketed, at any price. And, the High School in question, had to drop it’s athletic program, until it found another way to fund the insurance requirements and transportation.
SOME FINAL WORDS:
Specialty crops are often not accommodated by normal State channels. In many situations, it is desirable to have an advance contract with price determined prior to planting. To contract profitably, growers will have to carefully estimate their anticipated production costs. This is why I always council on smaller feasibility studies for any new crop.
Even with a contract there are risks of non-performance or misinterpretation. These risks can be minimized by carefully reviewing the terms of the contract and the credibility of the buyer. Both the buyer and seller need to understand all terms of the contract before signing the agreement. If you still have questions, it may be advisable to have an attorney familiar with contract law review the agreement.
I have found over the years that a company or buyer is only as good as their word. Contract are only as good as those who sign them, and only keep “honest people honest.” A Letter-Of-Understanding, in your own words, is probably the very best form of contract one can have. It is in plain English, one that anyone can understand and relate.
Finding honest buyers is like any other kind of marriage. There are good ones, and there are bad ones. Unfortunately, you never really know until you marry them. Older, more established firms, have a reputation to uphold and maintain. Newer companies are often “in a hurry.” And, as said before, contracts are only as good as those who sign them.
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