Model For The Future?

By Jim Prevor, Editor-in-Chief, Produce Business

The Bayh-Dole Act of 1980 gave universities intellectual property rights for things such as university-developed varieties of fruit. This meant that what was traditionally a kind of public service provided by land-grant institutions to growers within the state in which the institution was located now became a revenue-producing activity.

We can give personal testimony that Tasti-Lee is a pretty tasty tomato, though the claim of premium pricing should really be qualified. This is a field-grown tomato, and although the price may be premium compared to most field-grown tomatoes, it is typically less expensive than most hothouse tomatoes. So good taste at a decent price sounds like a winner.

Indeed, Bejo Seeds hopes to use this format as a model for its own growth: Get the rights to a proprietary variety, brand it for consumers and offer farmers a way out of the commodity trap.

Tasty varieties are important, of course, yet being tasty doesn’t in and of itself escape commodity pricing. After all, the new variety can just become the new commodity. Driving consumer recognition and preference through marketing is helpful, but the marketing efforts being done on behalf of Tasti-Lee are very small-scale. There is no $50-million-dollar-a-year TV advertising program to make consumers demand Tasti-Lee.

The real key to this business model is restricting production and limiting competition. That sounds like something evil but, in fact, is the only way to increase returns to growers.

Traditionally, land-grant institutions simply made new varieties available to all comers and let the market sort itself out — remember they had little financial stake in the outcome. This had two negative consequences:

First, it had a negative impact on quality — when anyone can grow something, some of what is grown will be planted in climates, soils and under conditions that are sub-optimal, so the product will suffer. Flavor and other desirable attributes are not typically qualities inherent in a magical seed; the fruit quality will vary based on where, when and how it is planted and what horticultural practices are used to raise the crop. Even if the quantity of off-flavor fruit is low, it can have an enormous impact on the price consumers are willing to pay.

Nobel-prize-winning economist George Akerlof wrote a seminal paper called “The Market for Lemons: Quality Uncertainty and the Market Mechanism,” and it is not, literally at least, about the fruit. It is playing off the slang term for used cars that are discovered to be flawed after they are purchased. It deals with two variables — variable quality, as in when tomatoes of the same variety taste differently — and asymmetric information — when the sellers know more about the product than the buyers — say whether it was grown in an area that produces the tastiest fruit.

The comeuppance of Akerlof’s article is that consumers won’t pay a premium for a product because they will not be certain they will get a premium product. So by carefully selecting who can grow a proprietary variety and then ensuring it is not grown in sub-optimal environments, consumer confidence in the quality of the variety can be increased, and thus consumer willingness to pay a premium will increase.

Second, allowing unrestricted planting and marketing of a variety led to a predictable cycle for even the best fruit. A new variety would be introduced; it would attract a premium price and attract high demand. This would lead to more plantings of the desirable variety and ultimately, as supply rose, the markets would become flooded, prices would drop and what was once a premium item would become, at best, the new normal and, often, a loser.

In theory, by licensing the variety exclusively to Bejo Seeds and then Bejo selecting key growers in different areas, assurance can be found that the tomato will only be planted in optimal conditions and the quantity produced will be restricted so as to avoid saturating the market and putting downward pressure on price.

It is a great play, and may well be the future of the entire industry.

Yet it is not without its challenges. For the universities, the model is a challenge to the land-grant culture. These institutions get taxpayer funding and typically sit on land given to them by the taxpayers — with the ethos that they are there to help all the farmers in their state. This approach challenges that ethos in two ways: first, often these varieties get licensed out of state, and second, even within the state, they are licensed to specific growers.

The model also is a challenge for seed companies. Seed companies make money by selling seed; the more they sell, the more money they make. It takes an enormous discipline focused on long-term value to restrict plantings so as to boost grower returns — when simply meeting demand would mean a big boost in profits for the seed company.

There is much to be hopeful about in this effort. The focus on the consumer; the focus on flavor; the use of research — albeit small-scale — to ascertain consumer perception; the use of marketing, again albeit small scale, to differentiate the product. The open questions are how land-grant institutions can reconcile restricted marketing with their public service mission and whether new ways can be found to price seed so that seed companies won’t constantly be driven to increase plantings.