Specialty crops are an opportunity with risk
As a young man growing up on a farm, I always enjoyed listening to talk radio in the tractor as I did spring and fall field work. My favorite radio personality was Paul Harvey. He had a program that he called “The Rest of the Story.” The idea was to talk about significant items of historical events that may be unknown to many people.
The significance of the agricultural boom in North Dakota has been well-publicized. The majority of the stories discussing this boom are focused on the expansion of corn and soybeans. This definitely is a huge factor in North Dakota. However, to not talk about the specialty crops grown in the state would leave out “the rest of the story.”
North Dakota is the No. 1 producer of barley, canola, dry edible beans, dry edible peas, durum, flaxseed, honey, lentils, navy beans, pinto beans, spring wheat and sunflowers.
As soybeans and corn have moved into the eastern part of the state, they have pushed the production of these specialty crops further north and west. Malt barley is an example of this transition. The Red River Valley used to be one of the largest producers of malt barley. Now, if one drives through the valley, it is difficult to find a field of malt barley.
Farmers also are growing fewer crops. Prior to the early 2000s, the average producer planted seven to 12 crops. Currently, the average is two to five crops.
I am working with Frayne Olson, North Dakota State University (NDSU) crops marketing specialist, and Joleen Hadrich, Colorado State assistant professor, on issues associated with growing specialty crops and how processors of specialty crops manage their risk.
The market structure of specialty crops is different than the major commodities. The market structure for these crops often is referred to as a “thin” market.
This simply means that there are only a few buyers and sellers. For example, if one were to identify growers and processors involved in the food-grade soybean industry, it would be a short list. The small number of buyers and sellers also implies smaller market volume.
Specialty crops are not publically traded on any exchange. The lack of hedging mechanisms forces farmers to rely on contracts to mitigate risk. These crops also are sensitive to quality characteristics and greater production variability.
From the grower’s perspective, a large portion of the risk associated with growing these crops has been that they are more quality sensitive than wheat, soybeans or corn. The contract between farmer and processor is very stringent and includes premiums and discounts for quality.
Traditionally, specialty crops have been viewed as being more volatile or risky than the big three (corn, soybeans and wheat). During the past decade, we have seen large price swings in all commodity prices.
We examined the change in volatility of these specialty crops, as well as corn, soybeans and wheat. We found that the volatility in a majority of commodity prices has increased. We also found that the volatility of specialty crops has increased more than corn, soybeans and wheat.
Specialty crops play a major role in North Dakota’s agriculture. To focus all the attention on corn, soybeans and wheat would ignore key components of the state.
Producers and processors of these crops must be aware of the risks, understand the benefits, and take the time to examine contracts closely when growing these crops. — Ryan Larsen, Assistant Professor, NDSU Agribusiness and Applied Economics Department