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Perishable Pundit
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a

Produce Business

Deli Business

American Food & Ag Exporter

Cheese Connoisseur



AgriWorld Takes
On More Customers

Jim Prevor’s Perishable Pundit, April 4, 2008

There recently has been an avalanche of press releases announcing various company relationships with an organization called Agriworld Exchange, which calls itself, the “Premier Online Agricultural Marketplace.” What is this all about? Does it herald the return of the dot-coms? We asked Pundit Investigator and Special Projects Editor Mira Slott to find out more:

Arlin TorbettDr. Arlin Torbett
Ph.D., Founder/Chairman/CEO
AgriWorld Exchange
Menlo Park, CA

Q: For context, tell us your background and how it led you to develop AgriWorld Exchange.

A: My background is really high tech things. I received a Ph.D from Stanford University in Management Science & Engineering, and was part of the original team that designed the packet radio in the early 1970s. When we started the process, the Internet in the 60’s was a wired network connecting government contractors.

We were trying to hook another computer onto the network and AT&T refused to connect this line in the desert. We thought, “Why don’t we use radio or satellite?” We put a team together of other contractors and developed the packet radio, forming the protocols to link the University of Hawaii to wireless radio.

We built a network in the Bay Area as a test bed; the beginnings of all the wireless data systems. There’s a funny side story. Having show-and-tell every six weeks, we were working on protocols to mitigate multi-path interferences. We were developing a solution, and Bob Metcalfe suggested we put it on cable. We all laughed, since this is what we were trying to get away from, and Bob specked it on the table and called it Ethernet. That was the beginning of local area networks and all digital wireless technology today.

We were just a bunch of crazy scientists who had no idea we were going to change the world! As my career evolved in the Valley at a start-up company, China was our target market, and our goal was to develop online wireless stock trading. When we got into the stock market, most were day traders who lost total visibility when they left the floor. We employed the infrastructure and the needed applications to link traders to the Shanghai stock exchange with handsets to buy and sell stock through the exchange wherever they were.

These were the fundamentals of me starting to do e-commerce.

Q: How did a technology guru end up in the produce industry?

Joseph Goodwin
Joseph Goodwin

A: It happened when one of my partners, Joseph Goodwin, introduced me to Daniel Ruz, a guy with a farming background and a good idea. He came from a Cuban family, was born in Miami, grew up in Los Angeles, and was studying to become an architect. He fell in love with a beautiful young girl with a family in farming.

Daniel Ruz
Daniel Ruz

He had so much fun with farming and the produce business, and his fluency in Spanish opened doors in Latin America and Mexico. As CEO of Exodus International, an agricultural trading company supplying fresh produce specialties, he brought his vision for an online agricultural marketplace to solve long-standing needs of the industry. [Editor’s Note: read more about the AgriWorld Exchange team here.

Q: What were the key tenants you wanted to incorporate in your system?

Steven Teixeira
Steve Teixeira

A: When the three of us started talking about this, we were surprised no one did in produce what we did 20 years ago in the semi-conductor industry. Produce has a worldwide market much like the semiconductor industry.

The industry is changing very rapidly worldwide. It is no longer your grandfather’s farm practices reaching a small distance. With global competition, you have to have controls on information sources and practices; first to insure we’re getting safe products, and second that we’re able to compete in the open international market. It is critical for the industry to not just provide a simple exchange to enable buyer and seller to exchange produce, but how can we help the industry as a whole with food safety and efficiency practices worldwide?

Vince Ferrante
Vince Ferrante

Q: Sounds like a tall order. How do you translate semi-conductor, manufacturing methodologies to the very perishable and fragmented fruit and vegetable trade?

A: A lot of the methods used in the semi-conductor industry are applicable to produce. When inserting the chip in the board of a PC or other electronic equipment, you need to know where that chip came from, the suppliers, manufacturers and shippers, the plant and methods used, and the dates and lot numbers if there’s a problem out in the field.

How pure is that product quality? In distributing worldwide, you need to develop protocols for backward and forward traceability, so if an issue arises you can track that particular product through the distribution channels to the end users, do a recall and replace that chip. In produce, we’re trying to do the same thing we did in the microchip industry. People are starting to realize the benefits of RFID in the produce industry, that you have to put codes on product, but you need to keep adding information to the protocol through the distribution channels.

The perishable nature of fruit and vegetables creates additional challenges. Food safety is one of the fundamental tenants in the platform we designed. We talked about better ways to do food safety tracking. It goes back to the semiconductor industry down to the individual chip. In the produce industry, the discussion right now is focusing RFID at the case or box level, not identifying down to the apple, but it will at some point in the future, and we’ve built that into the platform. A key issue that AgriWorld Exchange addresses is not just how to enter the market but how to grow that market long-term by building that ability into the platform for year one, two, and down the line.

Q: How does the AgriWorld Exchange system work? What makes it different from other dot-com B2B companies that have struggled to make it in the produce industry?

A: In the past, especially in the dot-com days, companies put together online auction sites to facilitate fresh produce trading. Typically they worked this way: the buyer, a large retailer, for example, would post what he needed to buy, perhaps a six-month contract for lettuce, a different volume of red leaf. Then the growers would bid on each component.

The auction would carry on for a given period of time, and the bidders would be able to see the other bids, although not the identity of the bidders. When the clock stopped, whoever had the lowest bid for each component would win the deal. This is similar to the way eBay works, with the difference being that with eBay it is the seller who is posting the product for sale, and so the deal goes to the highest bidder.

However, the kicker is that the online auction provider would take a commission from each seller. Typical commission rates would be from 3 to 7 percent meaning that the grower would be squeezed even further. A few guys in the dot-com era tried this model and it all blew up. They used a revenue model like a broker, and growers didn’t want to pay for the sale of product.

We chose to do it like the stock exchange or telecommunication exchange and base the fee on so much per minute. That’s the way we priced the exchange. We have a flat fee for blocks of time and number of transactions. At the low end, it is $200 per month for 300 transactions, and you can buy one-month, six-month, and one-year blocks, with discounts for longer blocks.

We don’t care how big the transaction, whether you ship a load, one carton or 500 cartons. It’s the Charles Schwab model for stock trade. In talking to various growers and shippers, they said that model’s a slam dunk. They saw it as a way to optimize the supply chain without being penalized financially for the size of business they booked.

Q: Who’s on board since you began the venture?

A: We launched at PMA in October, and we’ve been sending out a series of press releases. We started the business January 1, 2007, but kept quiet, operating in stealth mode while forming a whole series of alliances, including with cProduce.com, Primus Labs and Blue Book and Red Book.

We developed a three-way agreement with the Confederation of Agricultural Associations of the State of Sinaloa, Mexico (CAADES) that represent growers, and the Council for Economic Development Sinaloa/Center for Investment and Trade (CODESIN/CIT), working closely with the secretary of economic development. Part of the agreement is providing a training center where instructors will train all 25,000-plus growers. We opened an office in Los Angeles to develop buyers for their produce with the goal of doubling exports in the next two years.

Mission Produce also signed up, as well as The Garlic Company, Cal Citrus, and Pioneer Growers. Now we’re starting to work on the buyer side.

In many instances, you have a community of growers selling today. Pioneer Growers in Florida, one of the largest sweet corn producers in the country, has a couple hundred buyers they sell to. The way the exchange is set up, you can pull in that community and continually sell as a private network, and you can also post in a public network to extend your market reach to new buyers with one click.

Q: No one else is doing this kind of service?

A: No one is doing something like this; there are a couple of companies that export — one in India sells grain — that post auctions on eBay. With produce, most is negotiations. We’ve built our platform ground up specifically for fresh produce. In China, a company that provides farm information says they will develop an eBay system, but our approach is different.

In the U.S., no one is doing this in an open network; A couple of guys have built private networks for retail, hand tailored and customized for that retailer that you can’t take any place else. It goes out to their suppliers; that’s all it does. It can’t do non-contract.

The suppliers don’t like it because they have to buy each retailer’s network.

We chose to look at it another way; starting with the grower upward through the supply chain; any buyer in the world can buy from any seller in the world, with multiple languages, time zones, and pricing among manifold currencies around the world.

Q: How do you communicate the massive amount of product variances and insure both buyers and sellers are on the same page?

A: We made a deal with PMA to use its unique commodity and variety description and code system. PMA has a long, long list of codes with descriptions in English; i.e., crown broccoli or Red Delicious apple of a particular size, and that code can be put in any language, so when a Japanese user reads the code and an English user sees the same code, they can negotiate. On day one, it’s international in scope.

I’ve been in international companies most of my career. This wasn’t a U.S. or California company; it was a worldwide company from day one. We designed the system that way, with double bite technology for language differences — Japanese, Chinese, French, Italian German, it’s set up to do any language in the world now.

Q: Have technological advancements made it more feasible and economically viable to create broader, more effective B2B systems?

A: If you look even five to 10 years ago, when the dot-com bubble took off in 2000, technology was at the early development stage for e-commerce. You didn’t have a lot of services and open software platforms that exist today. You had to do everything from scratch.

In the dot-com era, it would cost $10 million to $20 million to start up the system. Companies couldn’t get enough traction to make it worthwhile. With our technology, we’re able to rack and stack and be efficient in the way we’ve constructed the system specifically for the fresh produce industry.

What has made our system work for the produce industry is the bringing together of guys who have been in the farming business their whole life with guys who have been in technology their whole life. Understanding the way the farmer thinks is critical. This is his process, not some eBay platform with features that have nothing to do with how he does business — particularly to the negotiation piece, integrating price with quality and value.

We are able to speed the process up and also give 24/7 postings, so some guy in China can read the information when he gets up in the morning, rather than trying to negotiate over the phone with someone in a 9- or 10-hour different time zone in the middle of the night. That’s why the Internet and e-mail became so important. Early on, I was involved in creating conference systems, so I could jump into a conference call going on 24 hours.

While the technology is complex, it was critical to make the interface effortless. If it takes weeks of training and combing through a huge manual to use the exchange, it won’t work. We spent time to develop simplicity with complexity on the backside you don’t see.

Q: It seems the exchange increases in value exponentially as more and more participants join the network. Do you get concerned that savvy competitors might try and hone in on your concept?

A: It is difficult for companies to copy what we’ve done. I’ve lived in Silicon Valley long enough to see things come and go. We get patents on concepts, techniques and algorithms to give us protection. More important is being the first. I’ve learned in this Valley that who gets there first gets 75 percent of market share. That’s part of successful companies; they aggressively moved out to get their subscriber base high. You must spend a lot of money to be able to do that. Our reputation is important.

We launched in October, with our first subscribers in November, and started generating revenue almost immediately, with almost 500 registered users, and a rate of well over 2000 subscribers by end of year just concentrating in Mexico and U.S. What came out of the Mexico conference was the opportunity to introduce the system to three other growing states that want to replicate what they are doing in Sinaola, and export to the Pacific Rim as well as the U.S.

Q: Did you interact with USDA in developing the system?

A: In researching the industry to develop the Exchange platform, I called up the USDA and asked: How do you come up with the posted volume of a commodity sold in a given day? Can you tell me how many transactions, and the distribution of those transactions, etc.? The USDA official said they call people, conduct a survey and on the basis of that poll, they forecast what the whole country has done that day. That’s a noisy model and doesn’t give you any detail.

We have a methodology to instantaneously give size and distribution of transactions like the stock exchange; to see the highs and lows, and how big the blocks down to individual share. As we capture transactions going through, we will know how many cartons of apples sold, fluctuation of price, so at any given time, the subscriber can find pricing, which is changing every hour on the hour, see the highs, lows and averages, and look at trends over the years. If I’m a grower or buyer, I want that data to know how to hedge my bets; these are day traders, and the commodity industry needs this kind of system.

Q: In this age of consolidation and food safety concerns, major retailers and foodservice operators are moving toward fewer suppliers to gain more control over what products are coming into their operations. Does your system become more or less important in this scenario?

A: Certainly to the retailer, there are advantages to capturing a certain number of suppliers that supply all needs; the reality is it is difficult to do — to have the whole revenue stream coming from a few guys. On the other end of the supply chain, the farmer doesn’t want to be totally dependent on that large contract, prefers to spread it out a bit, but also wants the ability to have contracts; a certain percent for stability. On the retail side, the retailer is doing 20 to 25 percent of produce offcontract, and there is pressure to buy local, to buy organic, those are not big contracts. How does the retailer find where these products are?

You can do phased multi-delivery contracts; if the grower wants to go direct, he can do that in an open environment. By managing their community, they can optimize their supply chain.

Q: If a retailer is contracting with one supplier, product may often come from variable sources, especially when Mother Nature disrupts status quo. I imagine your system would be helpful in the case of freezes or other unexpected fluctuations in supply and demand.

A: A fire in California caused serious damage, and a major portion of avocados burned. For Mission Produce, that didn’t hurt them too badly because they were a worldwide company and had avocado fields in Latin America. In another instance, if there’s a freeze in Peru, it doesn’t kill everything you’re doing elsewhere.

A lot of major growers have looked at spreading out their risk on a global scale. A friend of mine in Florida, a tomato grower, saw high quality product and lower labor costs in Mexico and is now importing Mexican-grown tomatoes into the mix. Growers are getting smart.

Q: In the produce industry, family businesses go back generations when agreements were finalized by handshakes and nurtured in long-term relationships. Fast-paced technological change is not always easy or welcomed.

A: We talk to many farmers in transition now; a lot in their fifties and sixties passing on the business to sons in their thirties. The younger generations grew up in the era of computers and Internet and don’t have patience to talk to Charlie on the phone and tell from the inflection in his voice if he’s pulling my leg. The owner’s son doesn’t have patience for that and relishes new ways to accelerate our business. We go into companies, and show how this is much more efficient, where you can double volume, cut costs, increasing business and marketing reach. There are buyers, good buyers I don’t know about because I’ve been talking to Charlie.

As a kid growing up in the hills of Tennessee, my mother would go to farmer Jones and select various products. She’d point to the watermelon and ask, ‘is it grown in the field near the river? My mother knew that field had the sweetest watermelons.

In an era of supermarkets, we lost that visibility. Now with the exchange we have the capability to bring that visibility back. Product information can range from how the product looks to taste and flavor profiles to growing and food safety practices. Retailers are worried about food safety. Trader Joes, for example, said, ‘we’re not buying Chinese produce because we don’t know enough about the safety standards and protocols.’

Q: So this system fundamentally creates more transparent business acumen?

A: Sinaola growers export 500 trucks a day to Nogales and dump loads on the border; brokers buy and transport product to the U.S. The farmer in Sinaola has no idea where his produce goes. He doesn’t have visibility for who the buyers are. He doesn’t know if it’s the true price. That’s a barrier to the growers. They can still have the brokers; the smart ones say we can be a consolidated marketing arm, and we have to do it visibly, employed by the co-op. They can’t play the game they’ve been playing in the past. This exchange makes the playing field fairer.

Farm practices in the U.S. are generally viewed with very high integrity. What we discovered in Sinaola are growers who are very proud of farm practices that are good or better then what we have in the States. They do water and soil testing, pesticide control, etc., but don’t know how to market in the U.S. They ask: “As we jump into the U.S., how do we know the guy will pay us if we bypass the broker in Nogales?”

The exchange needs rating systems to detect how good the product and payment history, and that’s why we have an alliance with Blue Book. It goes to harvest and grades quality of product coming out. That lettuce quality determines how far it can be transported. Detailed knowledge about product is included in the description on the exchange with a picture.

That’s why we did the alliance with cproduce, and with Primus Lab, which tests water, residue levels, last time the field was fertilized and what pesticides were used. All this information can be included. We want to incorporate multiple sources of data to help the buyer and for the purpose of traceability.

When we look at the protocol of product moving along the supply chain, we need to track when the lettuce was washed, what wash was used, did that product have something added to it, and so on. That information is crucial in the event of a problem. Not everyone is uniformed in data methodology; that’s the whole idea of traceability, but we have to start with adding the information.

I go back to my experience with the semiconductor industry; no one wanted to provide all this information either, but when the end user said I need the information or I’m not paying the price, the suppliers acquiesced. The fact is that with food safety issues and recalls, it is expensive not to do it. Companies have recalls and have to pull back 800 cartons of produce when there is probably nothing wrong with 99 percent of them. Like buying insurance, sooner or later, people are going to say it’s more costly not to set up systems for traceability. The industry can’t afford the risk. Risk management will drive these initiatives.

I believe the industry will be self-regulated. Industry has asked the government to mandate, and it abdicated that responsibility. Lettuce growers in California formed a marketing agreement and signed up quickly because they saw the risk with the spinach crisis. PMA, United and WGA have taken the lead to advocate food safety and traceability measures.

Q: AgriWorld Exchange can be a platform and catalyst to help address these important challenges facing our global marketplace? In some ways, what you describe mirrors the reasoning behind development of the Perishable Pundit. It provides an interactive, dynamic on-line platform for analyzing key issues impacting the produce industry and connecting an international audience for global solutions.

A: I use Perishable Pundit as one of my major information sources; and a lot of the people I’m dealing with, you’re interviewing. We’ve stayed under the radar to form alliances and get them in place, and now we are building a base with powerful customers. The ball is rolling to create a worldwide strategy; now is the time to aggressively move forward.

We appreciate Dr. Torbett’s kind words about the Pundit, and it is certainly dazzling for the produce industry to think that one of our industry participants sat at the table where Ethernet was invented.

We wish Dr. Torbett and his team every success. Yet in real ways, we are uncertain as to Dr. Torbett’s analysis of the current state of the trade. Some of it is quibbles with specifics: He articulates a belief that “Lettuce growers in California formed a marketing agreement and signed up quickly because they saw the risk with the spinach crisis.” Yet we would say that we don’t have a marketing order in California, to this day, because most growers would vote it down. The Marketing Agreement worked, specifically, because it avoided farmers and gave ‘handlers” the seats at the table.

Dr. Torbett talks about exporters from outside the US needing credit information to bypass brokers, yet this strikes us as the least of it. They need sales staffs and market knowledge, easy ways to commence litigation in the US, a confidence that US courts will treat a foreigner well and, in our experience, the credit rating is often unimportant because they want the customer to buy the seed, advance money for the boxes, pre-pay the freight, etc.

The broader question, though, is whether the whole notion is in line with the way the industry is heading?

On the buyer side, as we discussed in the midst of the spinach crisis when we received this letter, if you want to ensure food safety, good taste or any other quality, you need to focus on developing an aligned supply chain that is dedicated toward your goal. That is different than just buying product with a particular certification.

On the vendor side, as buyer consolidation has occurred, the goal is to align oneself with buyers in a strategic relationship in which one provides value beyond the commodity. This may be year-around supply, supply of multiple items or private label services, assistance with merchandising and information or other value-added — including unique varieties and developing distinctive products. The auction mentality is exactly what one wants to get away from.

None of this is to say that AgriWorld Exchange won’t be successful. They have correctly noted that a discount broker pricing model makes this feasible. Many vendors could choose to list product.

The cost is minimal and it might be a source of business.

There are plenty of buyers who meet needs for their customers by having buying brokers on Hunts Point and other terminal markets; there is not a reason in the world they wouldn’t buy here as well.

What is interesting about Dr. Torbett and his insight that the world of produce has changed dramatically is that he actually proposes a “Back to the Future” solution. There was a time when the great fruit auctions ruled this industry; the Pundit Grandpa, Harry Prevor, bequeathed to his grandson the gavel he used to call to order the meetings of the old Fruit Auction Buyers Association. For decades he was Chairman of that once powerful association.

Auctions died for many reasons including technological change, when railroads gave way to trucks, and thus auctions, which typically received free rent from the railroads, lost their competitive edge over any large wholesaler.

The question now is whether technology shifted in such away that a “produce stock market” will be so much more efficient that it will supplant conventional selling.

It is possible — but unlikely. The problem is that produce is not a commodity in the way grain is, and it is becoming less so. Even on commodity items, buyers have decided preferences for certain labels and producers. And more and more organizations such as Sun World and Driscoll’s are selling proprietary items; seed companies, such as Syngenta, are getting into the industry with their own proprietary items, plus many companies such as Mann Packing are trying to transcend commodity sales all together by selling the product in a value-added form such as its Ready, Set, Steam! line.

Now these types of organizations and products could list on Agriworld Exchange, but that would not give it the characteristic of a stock market, which is that shares always reach a clearing price. Instead, they would just sit there, “here is Sun World’s offer” — with the vast majority of the product selling outside the system.

In fact, the danger for Agriworld Exchange is that sellers may always want to post the highest possible price on Agriworld lest some buyer check it out and note he was overcharged by the sales staff.

To us the only big driver for something like this would be if a big buyer just announced that from now on it was buying through this system. This is really the methodology that FoodLink (the old Agribuys) has used so successfully.

Still, the Grandma Pundit, Bebe Prevor, used to tell her grandson that “there is a tuchas for every chair,” and so perhaps Dr. Torbett’s concept of being a place where buyers can come to buy and producers to sell niche products such as local and organic will come to pass.

Many of the high tech products require several revisions before they show their full potential. We don’t necessarily see the imminent use of this system for a large amount of produce procurement but we haven’t dismissed it either. We will be keeping our eyes open to see how the concept develops.

Many thanks to Dr. Torbett and best of luck in advancing the industry through the use of technology.

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