I’ve been fortunate to benefit from the wisdom of great mentors. Mentors who passed down their knowledge and helped me to learn and develop. But I wasn’t introduced to one of my most enduring sages at either of the fine universities I attended. Nor through my professional exchanges. Rather, it was through my pre-school readings. The immortal Dr. Seuss (“On Beyond Zebra!” 1955).
Nutches and Nitches
Dr. Seuss gave us these wise words on competition:
And Nuh is the letter I use to spell Nutches
Who live in small caves, known as Nitches, for hutches.
These Nutches have troubles, the biggest of which is
The fact there are many more Nutches than Nitches.
Each Nutch in a Nitch knows that some other Nutch
Would like to move into his Nitch very much.
So each Nutch in a Nitch has to watch that small Nitch
Or Nutches who haven’t got Nitches will snitch.
I presume the good Doctor was primarily relating an ecological parable. I think however, it is also apt for understanding the importance of protecting your market niche.
Specialty crop producers often look to a market niche to generate a fair return on their labours. But committing to any market brings the risk that some other grower/harvester ‘Nutch’ will snitch your Nitch. Without differentiation, a compelling and sustainable low-cost structure, or other means to protect your market share, you may soon see yourself on the outside of the niche/Nitch looking in.
The Ginseng Example
An example of what can happen when you don’t protect you niche can be seen in the production history of North American ginseng (Panax quinquefolius) in British Columbia.
Chai Na Ta Corporation, the first commercial grower in the province, established 5 ha in 1982. The industyr grew, thanks in no small part to the dedicated support of a horticultural extension officer in central BC. By 1994 production had grown to 130 producers generating 1,100 tonnes of ginseng from 700 ha. And with farm receipts had increased to about $78 million (data from Association of Ginseng Growers of BC and Statistics Canada).
All Aboard the Niche Market Train
But things started to go awry in the late 1990s. Ginseng prices peaked around the mid $70 (USD) per kg in 1993. This peak came just as most producers were jumping on board. By 1999 prices had fallen to between $18 and $25 per kg. While still nominally high relative to carrots or potatoes, this did not cover the very high establishment and production costs.
By 2003, consolidation had reduced the number of BC growers to 30. These farms had a smaller production area but more than doubled the total annual production to 2,500 tonnes. This larger production volume however, only grossed $45.7 million. Working harder, producing more and making less is not an uncommon situation to many agricultural and forestry operations. But these are not the hallmarks of a sustainable market niche. Rather, it looked very much like ginseng was sliding down the slippery commodity slope to profit oblivion.
The general decline of the sector was reflected in Chai Na Ta’s rise and fall. As a publicly traded corporation, filings with security regulators show Chai Na Ta’s net annual earnings grew from $0 in 1982 to more than $6.8 million in 2000. This fell to a net loss of $9.5 million in 2006, and the following year the company discontinued operations.
The Commodity Trap
The industry collectively had fallen into a commodity trap. From it’s onset, North American ginseng was highly dependent (95% +) on exports to China via the Hong Kong market place. Producers did little or nothing to add value. Nor did they differentiate their output from ginseng produced anywhere else in the world.
Ginseng was initially a high value commodity. But it ultimately went bust because the market became saturated with supply. First from other areas in North America (most notably in Ontario and Wisconsin). And then from China. Once the Chinese started growing North American ginseng, their minuscule labour costs, lax environmental standards and general lack of enforced regulations gave them the low-cost production structure. An advantage that ultimately gave the PRC Nutches ownership of the North American ginseng Nitch.
Picking up the Pieces
The few remaining producers are now moving down the path towards creating an identifiable brand for North American ginseng. They are focusing on adding value to their production rather than trying to market dried roots to processors in China. And they are moving away from high cost artificial shade systems to natural shade agroforestry systems. Some are marrying their operations with agri-tourism ventures to gain new revenue streams outside of primary production.
Restricting production, serving smaller specialty markets and moving from “price takers” in the commodity market to “price setters” of products and services may finally land them the deed to a sustainable Nitch.