What do farmers and eBay sellers have in common?
When I was at eBay managing seller programs (1999–2006), e-commerce was in its’ infancy and a lot of first-time e-commerce sellers started their online selling activity on eBay. It was an easy platform — take a picture, write a title and description, set the starting price at $.01 and let the auction engine do it’s magic and over 7 days find enough buyers to get a winning price that ended up being a nice profit for the seller and a good (often great) deal for the buyer. At several points in the early 2000s, eBay had the virtuous flywheel of seeing simultaneous growth in items listed while the average selling price in many categories was increasing. eBay and eBay sellers were benefiting from all the growth in buyer activity.
Much of that growth slowed down significantly by 2006, for a number of reasons. Google keywords, new e-commerce platforms, and the growth of Amazon all contributed. But some of the wounds were self-inflicted. eBay did some research and found that trust and safety was a large buyer issue and was preventing some buyers from engaging more (or in some cases engaging at all) with the eBay platform. eBay read these data points — slowdown in the underlying business and trust and safety as a potential roadblock to more buying activity — and decided to increase trust and safety on the platform.
As a result, sellers got pushed through a lot more processes during the listing process, and programs were added to prevent potentially questionable seller activity such as shill bidding (bidding the price of an item up to force the winning buyer to pay more) and to protect Verified Rights Owners (VeRO program, to protect brand owners). The net impact of these changes in aggregate was that many eBay sellers started getting account impacts more regularly, including account suspensions.
Account suspensions are a big deal, particularly for sizable eBay sellers that often had a warehouse and employees to manage. Shutting down an eBay account for 14 days meant that for two weeks you could not list any items and if eBay was your only e-commerce platform, you did not have a lot of listing, customer questions, and shipping for your employees and you did not have revenue to pay for rent and utilities. For sellers new to e-commerce that were not great with financial modeling, this put many of them into really challenging positions because of one item listing that went wrong.
The classically entrepreneurial eBay sellers quickly figured out that this new Trust & Safety posed a significant threat to their new livelihood, and they reacted exactly as you would expect. They quickly found alternative platforms, and they shared with many other eBay sellers advice on how to do the same. Overnight, many sellers had inventory on Amazon Stores and their own e-commerce storefronts, and were buying keywords on Google to help bring more buyers to their storefront. Many quickly figured out that if they brought buyers to their own website, they could avoid many of the eBay fees, which sellers were not shy about pointing out were increasing fairly regularly.
You can argue how much of a factor Trust and Safety changes were in driving eBay seller behavior to find new selling channels, but it would have to be a very convincing argument to suggest that it was not near the top of the very short list of significant factors. I was there and talked to sellers live and via email regularly, and many of their stories began with “after my account got suspended, I knew I had to make changes.” It may not have been the only cause (in many cases there were multiple causes — including fee increases), but it was a big cause.
So what does that have to do with agriculture, you’re wondering? Great question — so let’s tie them together. I believe the coronavirus pandemic and shutdown can have the same impact on farmers that eBay Trust and Safety had on eBay sellers. It will create a strong desire for alternate channels to sell through. And just like eBay’s behavior pushed the sellers to act, I believe the breaking point for the farmers is the behavior by the farming equivalent of platform partners, their supply chain partners. Specifically, I believe the use of a nuanced legal phrase could potentially upend decades-long relationships. Let me introduce you to an old bad law school hypothetical friend from my law school days (JD — Santa Clara ’92) — force majeure.
Force majeure is the act of God clause. It’s meant to be used very rarely, and is in contracts because you need to put it in to protect both sides on the rare occasions when there actually is an act of God, knowing that it is very unlikely to be used. Frequently discussed in contracts class for first year law students, I almost never again heard the fine Latin phrase for 30 years — until this year. Growers up the supply chain from farmers have started using force majeure as a reason not to take delivery of products they had already committed to buying. The justification for the use of force majeure was the coronavirus shutdown. The legal theory is “because of this pandemic, I am not required to buy the items we agreed on previously at the prices we also agreed to previously.”
The use of force majeure has caused supply chain disruptions and increased food waste risk and uncertainty about what to plant in the next rotation for 2020 and what to prepare for plant for harvest in early 2021. Planting cycles are planned out months (sometimes years) in advance based on contractual commitments, and force majeure usage would have a tremendously negative impact on farmer’s ability to make decisions on what and how many acres to plant of various crop types.
As a result of this use of force majeure, two things have happened. First, the only people making money in the Salinas Valley at the moment are attorneys, and they’re plenty busy arguing both sides of force majeure. Second, farmers are now more aware than ever that deep reliance on a single key partner can have significant risk, even when the relationship between the two companies has existed for decades and been successful for both parties for much of that time. Farmers are a pretty patient bunch by nature — as long as things are getting incrementally better they will put up with a lot of “stuff” with the knowledge that both parties are trying to head in a positive direction than can be a win for both sides (even if the amount of the win is not always split 50–50). But force majeure is testing that patience. As a result, some of the farmers I talk to have expressed a willingness to consider alternate channels.
In my opinion, the willingness is as large as I have ever seen it. It turns out that the pandemic may be the proverbial straw that breaks the camel’s back. Converting a little used boilerplate Latin phrase into a sword against supply chain partners may or may not work legally, but it’s definitely not working at maintaining quality business relationships. I’m not going to name names because it doesn’t matter — the point of this post is not to call out individual actors, but rather to point out that the collective farmer community (which does talk, and often, so even if you’re not getting “force majeured” by your partners, odds are you know someone who is) is now realizing all at the same time that things may have just changed in a way that could have lasting impacts for the farming industry.
So what is the likely outcome of this new willingness to explore alternate channels? I think there are two likely outcomes. First, farmers will now evaluate (or in many cases re-evaluate) the potential to create direct-to-consumer (D2C) opportunities much more seriously. I believe this could create new opportunities for farmers to sell directly to consumers through monthly food box and similar subscriptions. This would require significant marketing investment, just like eBay sellers had to learn how to open a storefront and buy Google keywords. It would also reduce the risk of a huge negative impact from things like force majeure. Many farmers will see that benefit of risk mitigation as far outweighing the cost to investigate and launch a D2C channel offering.
Second, farmers will also re-think language around what happens when force majeure language is used. Again, with a history of very light usage, the language around force majeure, specifically the “what happens when this is used” were not always negotiated hard. I believe this will change for the foreseeable future. Anyone who watched 50% of a contract walk out the door behind force majeure will not get that feeling to go away for a long time. Negotiations around the “what if” will be longer and the party that just got force majeured will want to have additional capabilities added to the language expressly.
In one case, I know of a party that used force majeure on a farmer to get out of purchasing 50% of their contracted product amount, and in the next breath said (and I’m paraphrasing) “you can go ahead and sell the rest but let us know who you sell it to.” This is a family-friendly blog so I can’t print the appropriate response (rhymes with “what the truck”) to that particular statement. Whether or not the contract language said that the farmer was required to notify the partner of the new buyer, you can bet that a lot of contracts are going to get renegotiated. Farmers may have to (and many will gladly) give up something to get a change to the post-force majeure usage, but after this spring many will be happy to trade off other concessions to allow for better risk mitigation scenarios that keep them in control of these situations.
It remains to be seen how large an impact force majeure usage has on farmers generally, and what the long-term impact of the pandemic shutdown will be on channel choices for farmers. There should be two guaranteed winners: (1) consumers — who should have a few more D2C options to consider; and (2) attorneys who will be renegotiating the post-force majeure options. Just like eBay sellers that got a rude awakening from Trust and Safety policies and found other platforms to sell on, farmers got the same rude awakening from force majeure and will react with new channels and contract language that protects their interests better.
[Note that in the case of D2C options being considered by farmers, many of the supply chain partners would not be materially impacted. The volume of produce needed to supply a meaningful D2C opportunity is significantly lower than the volume needed to supply a food service partner. So in this case diversifying channels would likely be a win for the farmer (risk mitigation) and not have a major impact on their partners. I’m going to do some analysis in a separate post on the likely scope of the D2C opportunity and the farmer profile of those most likely to try this approach (in part based on some research on successful D2C players that are vertically integrated.)]
Executive Summary
eBay sellers learned a tough lesson when they received account suspensions from Trust and Safety violations in the early days of e-commerce. Smart sellers quickly learned how to create alternate selling channels and buy traffic through things like Google keywords. Many farmers learned a similar lesson when force majeure was used by their supply chain partners in response to the pandemic as a reason not to complete a contract purchase. As a result, many farmers are more interested than ever in taking a fresh look at D2C selling channels and in revisiting the contract language they have with their supply chain partners. The pandemic impact on farming could last a lot longer than the pandemic while both of these issues get worked on, particularly the D2C options.
