AIC Executive Seminar

E-Commerce in AgricultureWhy? How? What? Whither?

Rolf A.E. MuellerDepartment of Agricultural Economics

Information & Innovation -University at Kiel, Germany

http://www.agric-econ.uni-kiel.de /Abteilungen/II/

RAEM/AIC-EC-Sem2

E-Comm > Introduction

Digital IT in AgricultureDigital IT in Agriculture

Stand-alonecomputers

Wide-areanetworks

Info Buy $ SellFarmrecords

Decisionsupport

RAEM/AIC-EC-Sem3

E-Comm > Introduction

E-Commerce defined:v "... sales of goods and services over the Internet, an extranet,

Electronic Data Interchange (EDI), or other online systems. Payment may or may not be made online". (U.S. Census Bureau 2000)

v " ... business occurring over networks that use the Transmission Control Protocol/Internet Protocol (TCP/IP), i.e. the Internet, intranets, and extranets". (OECD 1998, p. 9)

v ”... trade that actually takes place over the Internet, usually through a buyer visiting a seller’s website and making a transaction there.” (Economist, March 2000)

RAEM/AIC-EC-Sem4

E-Comm > Introduction

1. Introduction

2. E-commerce readiness

3. Why and How? - Businessmodels

4. What? - Goods traded

5. Whither e-commerce?

6. CloseE-commercein Agriculture

RAEM/AIC-EC-Sem5

E-Comm > Readiness

1- United States2- Sweden3 - Finland4 - Norway5 - Netherlands6 - United Kingdom7 - Canada8 - Singapore9 - Hong Kong10 - Switzerland

11 - Ireland12 - Denmark13 - Germany14 - France15 - Belgium16 - Australia17 - New Zealand18 - Austria19 - Italy20 - Israel

E-Readiness rankings (top 20)

e-readiness =f (level of connectivity,

online business culture)

e-readiness =f (level of connectivity,

online business culture)

Source: Economist Intelligence Unit 2000in ITTA 2000.

RAEM/AIC-EC-Sem6

E-Comm > Readiness

1.9

2.6

10.7

68.9

83.4

136.9

0 25 50 75 100 125

Middle East

Africa

S. America

Asia-Pacific

Europe

N. America

Millions

Total Global Internet Users by Region

Source:NUA Internet Surveys, 2000in ITTA 2000

RAEM/AIC-EC-Sem7

E-Comm > Readiness

4,8

6,8

8

10

12,3

27

0 10 20 30

Taiwan

Australia

Indonesia

S. Korea

China

Japan

Millions

Asia-Pacific countries with highest numberof Internet users

Source: Nua Internet Surveys, 2000Japan Ministry of P&T 2000Iamasia 2000 in ITTA 2000

RAEM/AIC-EC-Sem8Source: WTO, 1998

600

1400

0

200

400

600

800

1000

1200

1400

1600

Internet charges per year, US$, 1995, withinfrastructure competition

Internet charges per year, US$, 1995, withoutinfrastructure competition

15

3

0

2

4

6

8

10

12

14

16

Internet hosts per 1000 inhabitants withinfrastructure competition

Internet hosts per 1000 inhabitants withoutinfrastructure competition

Internet chargesper year, 1995 Internet hosts per

1000 inhabitants

with competition no competition

Costs, competition and Internet penetration

E-Comm > Readiness

RAEM/AIC-EC-Sem9

E-Comm > Readiness

30

40

50

60

70

80

Mill

ion

s

January 97 January 00

Active Adult Internet Users in the U.S.

Source: Cyberdialogue 2000in ITTA 2000

Source: economist.com

RAEM/AIC-EC-Sem10

E-Comm > Readiness

Farms with Internet access, US and selected states,1997 and 1999.

8

13

23

14

29

5331

46

0 15 30 45 60

KY (min)

US

CA

NJ (max)

Sta

te

Percent of farms

19991997

Source: NASS July 30, 1999

RAEM/AIC-EC-Sem11

E-Comm > Readiness

Expected E-Commerce Growth, 2000 - 2004 (B2B & B2C)

0

2000

4000

6000

8000

2000 2001 2002 2003 2004

Year

Sal

es [

bill

ion

s U

S$]

Rest of the WorldWestern EuropeAsia PacificNorth America

US$ 6.8 trillion

US$ 657 billionSource: Forrester Research

RAEM/AIC-EC-Sem12

E-Comm > Why & How ? v C2C: high-tech garage sales

v B2C:� 0.64 percent of total retail sales of $821.2 billion in IV/99� of interest in markets for highly differentiated or standardized

products � issues: payment, privacy, customer acquisition & retention� online farmers' markets; wineries online; booking farm

holidaysv B2B

� "... roughly 1 of every 25 farms and ranches in the country bought or sold agricultural products on the Net" (USDA Sept. 2000)

� 12% of total sales in 2004 (~ $123 billion) (Goldman Sachs 1999)

� the only one of 12 industries with less than $100 billion in B2B-sales by 2005 (Jupiter Communications Oct. 2000)

RAEM/AIC-EC-Sem13

E-Comm > Why & How ?

0

400

800

1200

1600

1998 1999 2000 2001 2002 2003

$ B

illi

on

B2CB2BTotal

0

600

1200

1800

1999 2000 2001 2002 2003 2004U

SD

Bil

lio

n

B2CB2B

Total

Projected B2B & B2C E-Commerce

Growth for the U.S. Growth for Europe

Source: adapted from Forrester Research, 2000 (Europe)and eMarketer, 2000 (US) in ITTA 2000.

RAEM/AIC-EC-Sem14

E-Comm > Why & How ?Properties of B2B E-Commercev extended market reachv fastv 24-7-365v high fix and low variable costsv open or closed, as requiredv can be customizedv standardized practicesv choice of pricing institutionsv complements conventional commercev etc....

RAEM/AIC-EC-Sem15

E-Comm > Why & How ?

E-Commerce Applications in Agriculturev Support services

� Internet service providers - web site programming

v Saving transaction costsv E-Commerce intermediation

� Classified ads and directory services

� Match makers

� Market place providers

� Auctioneers

v Service integration

RAEM/AIC-EC-Sem16

BuyerBuyer

SellerSeller

Produce

MoneyInformation

Even a primitive transaction includes three flows

E-Comm > Why & How > Saving Transaction Costs

Transaction costs = Trading costs + Transport costsv "... it is not easy to find an actual case in which an exchange

operation can be performed without any economic sacrifices at all, even if they are confined only to the loss of time."

v "Economic development tends to reduce these economic sacrifices ..." (Menger 1981, [1881], p. 189-190)

RAEM/AIC-EC-Sem17

E-Comm > Why & How > Saving Transaction Costs

Source: OECD 1999.The economic and social impactof electronic commerce. p. 63.

Does the Internet increase or decreasecustomers' transaction costs?

Transaction cost savings of banks

• Farmpartner.com expects "process costs" savings of 3-7%• Suedzucker expects to reduce purchasing costs from

350 DM to 50-100 DM per transaction

Banktransaction

Paying a bill

Conventional US$ 1.08 2.22 – 3.32by telephone US$ 0.54 n. D.on the Internet US$ 0.13 0.65 – 1.10Saving % 89 71 - 67

RAEM/AIC-EC-Sem18

E-Comm > Why & How > Saving Transaction Costs

Delivery of digitized information productsv Information

� weather forecasts

� market news & forecasts

v Management and consulting services� data management & analysis

� decision support

RAEM/AIC-EC-Sem19

Ideally, in e-commerce all flows are in bits (agriculture is not ideal)

E-Comm > Why & How > Intermediaries

SellerSellerLogisticsLogistics

BuyerBuyer $ Bank $$ Bank $

Money

Produce

Info-MediaryInfo-

Mediary

Number ofbi-directionalinfo-links:Withoutinfomediary:

1/2n(n-1)Withinfomediary:

n

RAEM/AIC-EC-Sem20

E-Comm > Why & How > Intermediaries

Causes of disintermediationv conventional:

more reach for less richness� catalog-business� telephone broker

v new:shifting the R-R-frontier� photos & video on the web� interactive auctions

v critical constraint: the "human interface"

Richness

Reach

convent-ional

new

Source: Evans & Wurster 2000

store

catalog

Web store

RAEM/AIC-EC-Sem21

E-Comm > Why & How > Intermediaries

Classified ads and directory services� facilitate search & save time

� often specialized in product categories (one or several)

Match makers� connect buyers and sellers

� interactive price quote requests

RAEM/AIC-EC-Sem22

Detaching information from products

CulturalCultural

Info for realityInfo about reality

NaturalNatural

Info as reality

Technological Technological

E-Comm > Why & How > Intermediaries

RAEM/AIC-EC-Sem23

E-Comm > Why & How > Intermediaries

Market place providersv allow buyers and sellers to meet & communicatev specify and enforce rules for tradingv mostly several commodities and inputsv hope for large and liquid marketv variation w.r.t.

� access to logistics services

� access to transaction information

� accept title & risk

RAEM/AIC-EC-Sem24

E-Comm > Why & How > Intermediaries

Auctioneersv also provide a market placev and detailed rules for price determinationv hope to increase market liquidityv various bidding rulesv often combined with additional services v long tradition in electronic markets

RAEM/AIC-EC-Sem25

E-Comm > Why & How > Intermediaries

Service integrators ~ Portalsv serve as entry points for users on the webv two part business model

� business with the portal

� satisfy users' information needs

v balance between� keeping users at the portal

� leading users to other sites

RAEM/AIC-EC-Sem26

E-Comm > What ?

Goods tradedv Inputs

� ag. chemicals - seed - machinery parts - etc.

v Outputs� produce - livestock - used machinery - etc.

v Rights and obligations� water - insurance - quotas

v Informationv Management services

RAEM/AIC-EC-Sem27

E-Comm > Whither ?v Moore's Law of computer power

� Computer capacity on a chip doubles every 18 months� the capacity to carry out 1000 calculations per second cost about

$180 in 1980 and $0.0075 by 1998; - 43% p.a. (Kurzweil, 1999)

v Hard disk capacity growth� density of data stored on hard disks increased 1.3 106 since 1957� disk capacities are recently doubling every nine months� price per megabyte for hard disk drives has fallen from $11+ in

1988 to $ 0.02 in 1999 and $0.003 in 2002; - 45% p.a. (Toigo 2000)

v Agents or Bots� information management� price search� customize� negotiate

RAEM/AIC-EC-Sem28

E-Comm > Whither ?

Thompson, D.A. and Best, J.S. 2000. The future of magnetic data storage technology. IBM Journal of Research & Development 44(3).www.research.ibm.com/journal/

Growth in microprocessor capacity will continuebut trend in hard disk capacity is in doubt

RAEM/AIC-EC-Sem29

E-Comm > Whither ?v Gilder's Law of (fiber) Bandwidth

� Communication power doubles every 6 months (3x-computer power)** Use bandwidth to simplify everything else!

v Metcalf's Law� The value of a network to its users is approximately proportional to the

square of the number of its users => increasing network effect!

v de Long's Law� In building a network, you tend to do the most valuable connections

first * it is not clear whether the network effect goes up or down!(P. Krugman)

v Zipf's Law (as applied to the Web)� Traffic at a site ~ 1/ rank number of the site� Some will be very big, most will be minute, a few in between

RAEM/AIC-EC-Sem30

E-Comm > Whither ?

Source: Adamic, L.A. 2000Zipf, power-laws, and Pareto- a ranking tutorial.www.parc.xerox.com

Zipf's Law:AOL users' visits to various sites on a day in December 1997red line: ideal Zipf; black dots: observed; most popular site: Yahoo, 129,641 visits

RAEM/AIC-EC-Sem31

E-Comm > Whither ?

Source: Adamic, L.A. 2000. Zipf, power-laws, and Pareto - a ranking tutorial. www.parc.xerox.com

A small number of sites attracts most of the visitsAOL users' visits to various sites on a day in December 1997

Number of sites by number of users The same on a log-log-scale

RAEM/AIC-EC-Sem32

E-Comm > Whither ?

Zipf's Law:Requests for web pages at Sun's web site during a month

Nielsen, J. 1997.Zipf curves and website popularity.www.useit.com/alertbox/zipf.html

RAEM/AIC-EC-Sem33

E-Comm > Whither ?

Regulatory environmentv Securityv Authenticityv Market intelligencev Taxesv Industry regulation

Internal dynamicsv Standardsv Entrepreneurs and

infomediariesv Competitionv Finance

RAEM/AIC-EC-Sem34

E-Comm > Close

v Who will be the winners and losers?v What impact on farms, markets, consumers?v How to harness e-commerce?

We cannot cry'FULL SPEED AHEAD'

and trust that the outcome will be desirable.Brown & Duguit 2000, p. 41