By Tim Meyer
Statistics on Nebraska agriculture are plentiful. For example, Nebraska has the fourth-highest output of agricultural products in the U.S., while ranking only 37th in population. It's no wonder Nebraska's agricultural output ranks first when adjusted for population.
Most Nebraskans understand the importance of beef, corn, soybeans and ethanol, but on the other hand, secondary crops play an important role in the economy as well, especially in the western part of the state.
In 2015, Nebraska farmers planted just over 16 million acres with various crops. When corn, soybeans and wheat are removed, just over 2% is left for other crops. From this standpoint, the production of these crops could not make a large impact on the economic health of the state. However, given that low corn, soybean and gasoline prices have depressed the state's economy in recent years, it's important to consider multiple production opportunities. Dry edible bean production is one of these other enterprises that offer potential benefits for the state.
Top dry bean producer
While dry edible beans don't rank in the top five ag products raised in the state, Nebraska is the No. 1 nationwide producer of Great Northern beans, No. 2 producer of light-red kidney beans, No. 2 producer of pinto beans, and No. 4 overall producer of dry edible beans. In this respect, the importance of the industry is immense.
The production of dry edible beans is mostly limited to the western reaches of the state, where the climate is better suited to the crop. Even though the growing conditions are ideal for production, the actual production process is far from straightforward. Dry edible bean producers face all of the normal challenges of crop production, along with several other layers of complexity.
Meanwhile, dry edible bean growers face market dynamics less standardized than other commodities. The result of these less-than-perfectly-competitive markets potentially increases risk for dry edible bean producers.
One market structure not often evaluated in economics is oligopsony. Oligopoly, a direct parallel that is often studied, is a market where there are only a few sellers.
Oligopsony is the mirror image of oligopoly. Instead of having few sellers of a product, there are few buyers. The market power oligopsonists hold is derived from their ability to force a lower price on producers in a similar way that oligopolists are able to influence the market price in an upward direction. Simply put, oligopolists aim to extract consumer surplus from buyers. Oligopsonists aim to extract producer surplus from sellers (profit).
The fact that there are only less than four main processors of dry edible beans that producers can sell to, however, isn't sufficient to raise concerns about market practices as they relate to producers, but several other nuances in the market exist.
For example, there is no standardized futures contract for dry edible bean production. If producers desire to hedge risk, the typical arrangement is that they may contract a forward price with one of the processors, but not for the entirety of the crop. In addition, the local market is not active, with cash price changes happening infrequently. In short, the price data available at any given time could best be described as incomplete.
Another way to view prices would be specifically local. The prices paid by processors seem to have more influence from substitutes in production (soybeans) than global demand and prices. Another key detail is that there are times when processors allow producers to contract their entire crop. If the processor is willing to accept all downside market risk, the global price (that they have contracted to receive) is surely bullish. In short, there could be speculation that processors are exercising their market power by eliminating the possibility for producers to share in the profits of higher global prices.
Unlike animal protein products, there is little or no argument regarding the health benefits of dry edible beans. Dry edible beans are high in protein and fiber, all while being low in fat and calories.
While it's true U.S. consumers continue to increase per capita consumption of animal protein, it is also true that demand for healthier alternatives has increased. Unfortunately, studies show that dry edible bean consumption is negatively correlated with income. In other words, dry beans are considered an inferior good.
When the health benefits of beans are compared to foods like quinoa, chia, nuts, pumpkins or lentils, they compare favorably. These foods are all often associated with the moniker of "superfood."
The price of beans at the retail level is low, and this is a reflection of a lack of value-added beyond the processing level of the supply chain. For beans to be edible, useful and tasty, a significant amount of preparation is required. This value added is almost always the result of in-home production, which is both a benefit and curse. Because beans are sold in need of more value added, they are flexible in their use. Unfortunately, this low cost has firmly segmented beans as an inferior good — something you only buy if you have to.
However, the dry edible bean market is profitable for producers to continue to expand. When this is combined with the murky nature of the supply chain and the inferior nature of demand, the outlook for the industry is positive.
Part of the problem is exposure to market risk. This risk can be managed by holding cash reserves, spreading sales or utilizing derivative markets. None of these strategies address the long-run risk, however, of becoming very specialized in the production of only a few enterprises. Nebraska farmers and ranchers are resourceful, and diversifying production in enterprises such as dry edible beans will help guarantee a successful ag economy.
Meyer is an associate professor of practice at the University of Nebraska-Lincoln's Department of Agricultural Economics.
This report comes from Cornhusker Economics.