Rate of market penetration
Role of research
This paper will examine some aspects of the commercialization of novel crops, using the evening primrose ( Oenothera spp.), as an example. The evening primrose is a biennial plant, normally sown in July in the Northern Hemisphere. As it establishes it forms a rosette of leaves which grows to 10–15 cm in diameter by the onset of winter. The plant overwinters in the rosette form and in the following spring the stem elongates to form the flowering plant, which may be 1–2 metres in height. Flowering usually starts in early June and during the flowering period fresh bright yellow flowers open every evening, to fade by the following day, hence the name of the plant: the evening primrose. The plant comes to maturity in late September – early October and this is the time at which it is harvested. The seeds are very small, ca. 0.5 g/1000 seeds, with an oil content of ca. 22%. This is a highly unsaturated oil which contains 8–10% of a fatty acid known as gamma linolenic acid, or GLA. This is the component of interest.
GLA is important because it is also an intermediate in human metabolism in the production of prostaglandin hormones. There is a sound theoretical basis and a considerable amount of clinical data which suggest that supplementation of the diet with evening primrose oil can have a beneficial effect on certain human diseases.
With this in mind we can now examine some of the factors which affect the commercial viability of potential new crops.
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The factor which generally gets most attention is that of technical feasibility - that is, is it possible to grow the crop on a field scale? This is natural, as it is at this first hurdle that most candidate species fail. It is easy however mistakenly to think that if a new crop is technically feasible, then commercial exploitation will surely follow. For anything other than subsistence agriculture this is of course by no means the case, and there are a whole range of factors which come into play, of which economic feasibility is the most important.
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The economic feasibility is determined by the balance of the price which can be obtained for a product as opposed to the cost of producing it. The price of the product will be initially determined by the intrinsic value to the consumer, which is going to be dependent upon his perceived need. Clearly however, the price will also be determined by the price of competing products. To apply this to evening primrose oil, the product has a high intrinsic value to the consumer, in that it concerns his health, and at the time it was introduced to the market there were no competing products, so there were no immediate limitations on pricing.
On the other side of the equation the cost of production is perhaps a little more complicated. Clearly it is going to be determined by the yield which can be obtained; the higher yield per hectare the lower the unit cost should be. But it will also be influenced by the costs incurred by the farmer in producing the crop and by the processing and distribution costs.
The farmers of course are trying to maximize their profit and therefore tend to grow the most profitable crops they can on their land and this can have an effect on production costs. For example, evening primrose grows best on the most fertile soils. However, the most fertile soils usually produce yields of, for instance, wheat, in excess of 10 tonnes/hectare in the UK. Therefore to minimize the unit cost, it is better to place evening primrose in less fertile soils which it is better able to exploit than wheat. In this way the economic cost of the production is optimized when the plant is grown under conditions which are less than optimal from the point of view of the plant's own performance. In other words, the best place to grow the crop may not be the place where the crop grows best.
Another factor affecting the cost of production is government intervention. In the EEC there are extensive crop subsidies for existing major crops and these subsidies can stifle the development of new and alternative crops. As an example of this, in 1979 there was an attempt to introduce agricultural lupins into the UK as a protein and oil crop. The lupins were directly competing with peas and beans which were receiving government subsidy. Lupins were not eligible for a subsidy because the production area was too small. However, a larger area was difficult to achieve in the face of such unfair competition. It was a `Catch–22' situation. If governments wish to achieve diversification of agriculture they could consider a subsidy for novel crops in addition to the current mainstream crops. This could be administered to crops with an area of less than say 5000 hectares per annum (in the UK) Ä and be made payable on a hectare basis.
In summary, if the cost of production is too high, or the price obtainable too low, it does not matter how technically feasible a crop may be, it will not make any impact in commercial agriculture.
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Given economic feasibility, there is still of course a limit to the size of market which the product can achieve and this will also depend on a number of factors. The need for the product is probably the most important, for if there is only a small market, then development costs are likely to be prohibitive, even though the crop is potentially able to make a running profit.
Similarly the absolute cost of the product will be a limiting factor if it is too expensive; the relative cost of the product is also limiting if the competing products are a similar or lower price. The level of quality is also important, as perceived by the buyer, and the market size could be limited by production capacity if there is an overriding supply constraint.
A further factor is the question of supply stability. If the supply is unstable this will limit the crop's acceptance in the market place. While fluctuations are common in established crops (such as for instance coffee) they tend to be more severe in new crops because yield is uncertain. In the case of evening primrose this is exacerbated by the length of the life cycle, and the small size of the demand relative to production capacity. The impact of such instabilities can be reduced for evening primrose by making good use of contracted production, where the price is related to the real costs of production rather than market forces; by growing in both Northern and Southern Hemispheres, to stagger sowing dates; and by investigating ways of shortening the life cycle.
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There are therefore a number of limits to the size for the potential market achievable and this is perhaps obvious. Possibly less obvious are the limits to the rate at which a market potential can be achieved by a new crop and these limits can affect both the supply and the demand side of the equation.
On the supply side one of the constraints is the rate of germplasm multiplication. For a new crop which is in great demand it may take a while for the germplasm to be multiplied sufficiently to achieve the production required. Many commercial crops only achieve a five or ten–fold multiplication in each generation, which means that it can take six or seven years to achieve sufficient seed stocks for large-scale commercial planting. In evening primrose, this is not a problem, as a single plant can easily produce 150,000 seeds.
Another problem is that of grower resistance to a new crop. Growers are naturally reluctant to risk an untried crop because if the crop fails then they lose their income from that area of land. This is particularly true if any additional investment in equipment is required. The climate in this respect is, however, rapidly changing. Ten years ago UK growers were extremely reluctant to try anything new and their gross margins had to be guaranteed before they would even consider a new crop. Now, however, it is possible to put out new crops without too much difficulty and pick and choose between growers.
Similarly up until now contracts have usually been placed on an area basis, where the buyer contracts to purchase whatever is produced on a given area of land. This protected the grower from having surpluses which he would have to sell on his own behalf. This is beginning to change and it is likely that in future, for evening primrose, more and more contracts will be placed on a tonnage basis with a grower or grower–organization deciding bow many hectares need to be planted to achieve the contracted seed quantity.
Incidentally it should perhaps be pointed out that growers do not always behave as rational economic animals and as an example I would quote the case of borage versus evening primrose. Borage is a short season annual crop which also produces an oil containing GLA. It is planted in April, whereon it grows very vigorously to a harvest in late July or early August. It is a very attractive plant to farmers, as it smothers weed competition and is very easy to grow. However, as the plant matures - and it matures over a period of time - the seed is dropped to the ground, it not being contained in any kind of pod or similar structure. Therefore there is a need for swathing or desiccation of the crop and if the weather should be bad then it is quite possible to lose a crop completely, with consequent total loss of income from that field. By comparison, however, most evening primrose crops fail at the establishment phase, so that a grower knows within a month to six weeks whether he will have an effective crop. Since evening primrose is planted in July, this means that if the crop fails he will still have time to follow with a replacement crop, such as winter wheat, and so will not lose income from the land in the following season. Logically therefore, if a farmer has had a failure with either of the crops it would be expected that he would be more likely to take a second crop after an evening primrose failure than after a borage failure, since his economic loss is much less. However the reverse is true, since the farmer will probably take the attitude that he was so close to success with the borage crop, that given a change in management and better luck next year he could have a good harvest, whereas with evening primrose be would consider that since be never got an establishment it is not a crop that he could work with.
Another source of resistance to new crops is from processors and this can occur even with established crops. An example of this is making barley, where there can be considerable resistance from the maltsters to the introduction of any new variety. The reason is that they have already established the process criteria for the currently grown variety and any change requires them to repeat their development work. Examples of novel crops which have not been taken up by manufacturers are manifold, such as for instance fenugreek, which contains a source of diosgenin for use by pharmaceutical companies in the manufacture of the female contraceptive pill.
Another limiting factor to the rate of market growth is the financial uncertainty involved with the development of any new crop. For a commercial company developing a new crop this can cause considerable problems. This is particularly so in the case of evening primrose. Since it takes three years to take a crop from the first contract negotiations through to having the product derived from that crop on the shelves of the stores, it means that one has to be able to predict sales three to four years in advance. This is no easy task. Having determined how much raw material will be needed for the sales it is then necessary to determine how many hectares will need to be contracted in order to achieve that production. If the estimates are on the generous side then there is the risk of building up a substantial store of surplus seed and if the estimates are on the low side then there is the risk of running out of stock and hence having a catastrophic impact on the company's finance. Bearing in mind that each crop is planted before the results of the previous crop are known, it can be seen that there is a considerable uncertainty built into the planning of production of a crop like evening primrose and this must inevitably reduce the rate at which the crop can expand.
Most novel crops suffer from supply uncertainties, given that the yield from a contracted crop cannot be predicted with any great certainty. Evening primrose certainly is prone to crop failure and yet a good crop can yield up to 1,700 kg/ha. This further contributes to the instability of supply which in turn limits the rate at which market penetration can be achieved.
On the other side of the coin there are also demand limits to the rate of penetration achievable by a novel crop. These are largely covered by the marketing function and would include consumer awareness of the product - that is to say, if the consumer does not know about it he certainly will not buy it and also consumer resistance - if the consumer does not believe what is said about it he will not buy it either. Other factors also have to be taken into account, such as the resistance from distributors, who may take some convincing that a new product is going to achieve the sales predicted. Furthermore, if a new product is being introduced into an area which is already served by competing products, then the livelihood of these competitors is being attacked and they can be expected to take countermeasures.
In summary the achievement of the potential market size will certainly not be immediate and in fact may take even decades.
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The above discussion implies a static picture of supply and demand factors affecting the market penetration and potential market size of a new crop, but of course there are many additional factors which can influence the outcome of this balance and change it with time, of which probably the most important is research.
Novel crops have usually been little researched and so little is known of their agronomic requirements and generally only unimproved genotypes are available. In the market place they will have to compete with a range of established and highly researched crops and will hence be at a competitive disadvantage. An example of this situation is the agricultural lupin which as a source of protein and oil is competing directly with plants such as oil seed rape and soya bean. Since it has no particular advantage over these commodities it is clear that for success it must be competitive with them. There is therefore a threshold which the crop has to reach in terms of performance before it can be commercially grown. This means that a considerable investment has to be made over a long period of time without any significant commercial return being received and this is very difficult for commercial companies to do. To take an alternative situation, the evening primrose was introduced as a novel oil seed containing GLA and, with no competitors in this field, the prices could be organized so as to cover the cost of production at the start, almost irrespective of how high those costs were. Thus there was income generated from the very beginning, which made it possible to invest in research on agronomic aspects of the crop to reduce the production costs. This in turn increased the income and hence increased the incentive for doing further research:
In the absence of government assistance therefore, it is likely that only new crops which exploit new uses will be developed, and not better crops for existing uses. It would seem sensible therefore for governments to fund extensive research on new crops up to the point where it is possible for them to make money, or least likely to be possible, and at that point allow the private sector to take over. It is only by this means that a range of alternatives to existing crops are likely to be produced.
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There are a range of factors which will determine the economic feasibility and market potential of a new crop and how fast that potential may be achieved. These factors have to be assessed together with the likely impact of modifying factors, such as research and governmental intervention, when judging whether or not a species is worth pursuing as a potential future crop.
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