Why Can't Fresh Produce Be Commoditized In The Same Way As Dry Produce?

Simply put, the cost of production for fresh produce is variable, not fixed.

Characteristics of a commodity

What is a commodity? Simply put, a commodity is a product where there is little differentiation between various producers. This interchangeable product has uniform pricing, barring local economic factors like taxation and subsidies. Due to these unique characteristics, commodities are produced in regions supporting the lowest cost of production.

For example, oil. The price of oil is largely stable, regulated, and frequently hedged by traders, producers, and volume consumers. Production is limited to low cost locations like the Middle East; but when the price of oil is high, production becomes economically feasible in higher cost locations like the US (where we saw the fracking industry booming earlier in the decade). This is a good example to use when we are trying to look at food as a commodity.

Now let’s talk about vegetables. Vegetables can be broken down into two ways: 1) fresh produce, such as lettuce, leafy greens, tomatoes, cucumbers, etc. (which have a very short shelf life, often less than two weeks) and 2) dry produce, such as rice, onions, garlic, and ginger (which typically have long shelf lives).  

Dry Produce and Grain Commodities

Currently, dry produce and grains are considered commodities. For example, grain and oilseed futures are traded daily on the Chicago Mercantile Exchange. Why? Dry produce like rice is the same whether grown in the United States or India, it is interchangeable. It is easily stored and transported due to its long shelf life. If the cost of production including transportation is lower in India compared to the United States, then you simply produce in India and sell in the United States.

Fresh Produce

Similar to dry foods, a head of lettuce in the United States is comparable to a head of lettuce in India. However, since fresh produce is highly perishable, coupled with inefficient infrastructure and logistics, it is infrequently exported to long distance markets.

Developing countries are most often lacking in strong logistics and infrastructure. Consequently, we see up to 75% spoilage, relative to the United States, in fresh produce in developing countries like India and Kenya. Lack of cold storage infrastructure, combined with bad roads and the high cost of fuel in virtually all developing countries are the key drivers of spoilage. As a result of this highly inefficient system, in developing countries large networks of middlemen have been established to facilitate logistics and market distribution. These middlemen significantly drive up the price of fresh produce. For example, in India, a 2018 government report stated that at least 75% of the consumer cost of fresh produce is attributed to the cost of middlemen. This is why fresh produce in developing countries often costs more per unit than in developed countries, even after accounting for cost of labor being lower in developing countries and higher usage of mechanization in developed countries. So how can fresh produce be commoditized in developing countries? The simple answer is, to eliminate the two issues driving up price; inefficient logistics and spoilage. The big question is how?

The Solution: Establishing a Fixed Cost of Production for Fresh Produce

Short of improving logistics and infrastructure, markets need to minimize reliance on expensive and inefficient logistics and infrastructure offered by middlemen. By setting up operations as close to market as possible, markets can enjoy commoditized prices for fresh produce. The problem with this solution is that traditional soil based agriculture does not provide the required yields needed to economically justify investments in large scale soil based agriculture in the vicinity of urban areas, where land prices are exorbitantly high.

With an Aquaponics setup, we see several economic and productivity efficiencies compared to traditional soil that allow us to justify this investment and grow fresh commoditized produce in urban areas. With higher yields and general productivity ranging from 15x - 25x per unit of area compared to soil, combined with significantly lower use of critical resources (e.g. Aquaponics uses 97% less water than soil), farmers can stabilize the fixed cost of production. This enables producers to trade vegetables locally as a commodity and maximize profits.