The U.S. Food and Fiber Industry

The U.S. Food and FiberIndustry Chapter 2

Discussion Topics • Review of index numbers and real value of money • What is the food and fiber industry? • Review the changing complexion of farming • Discuss the role of other sectors in the food and fiber industry

Output and Price Indices 1.10 = 5,289÷4,828 Output 10% higher in 1995 than it was in 1990…. 1.16 = 0.84÷0.72 Price 16% higher in 1995 that it was in 1990…. 1990 is the base year as index set to 1.0 Page 14 Page 14

Nominal and Real Expenditures 198.44 = 302.4÷1.524 The increasing CPI eroded the purchasing power of the dollar…. CPI was 52.4% higher in 1995 than it was in 1982-84 period 1982-84 avg is the base year for the CPI

Characteristics of the Food and Fiber System

The Agricultural Sector • The agricultural (food) industry can be divided into four major sectors: • Farm service • Agricultural Producers • Processors • Wholesale/Retail distributors and marketers • The final marketing chain component is represented by consumers Pages 17-26

The Agricultural Sector Farm Service Sector (Implement dealers, chemical sales, fertilizer sales etc.) Producers (Farmers, ranchers, etc.) Consumers Processors (Manufacturers, bottlers, etc.) Marketers (Distributors, retailers, etc.) Pages 17-26

Agricultural Sector Importance • An estimated one-fifth of all jobs in the U.S. are related to some aspect of the food industry • In many developing countries, more than half of the labor force engaged in agriculture • On a global basis the food industry is the largest industry in terms of people employed and value of product Pages 17-26

The Agricultural Sector Farm Service Sector (Implement dealers, chemical sales, fertilizer sales etc.) Consumers Pages 17-26

The Agricultural Sector • The farm service sector provides producers with inputs such as feed, fertilizer, fuel, equipment and chemicals. • Many firms are multinational corporations: John Deere, DuPont, and Monsanto • There are also a variety of small, local service companies that serve diverse needs of local farmers for irrigation equipment, farm structures, etc. Pages 17-26

The Agricultural Sector • Also numerous firms that provide farmers with financial services • i.e., Banking, accounting, insurance, legal advice, risk management and agronomic consulting • As farming becomes increasingly complex, farmers are pressed to rely heavily on providers of farm services • A fast-growing, highly localized sector of the food industry Pages 17-26

Relative Importance of Farm Input Expenditures • Agriculture sector as a whole • Relative values depend on farm type Page 27

Relative Importance of Dairy Farm Input Expenditures Source: Economic Research Service, USDA Data is for 2009

The Agricultural Sector Farm Service Sector (Implement dealers, chemical, sales, etc.) Producers (Farmers, ranchers, etc.) Consumers Pages 17-26

The Agricultural Sector • The producer sector includes those engaged in the biological processes associated with production of food/fiber • i.e., Farmers, ranchers, fruit growers, nurserymen, etc. • Producers purchase from farm service sector and sell to the processor sector • There is an increasing movement for producers selling directly to consumers Pages 17-26

The Agricultural Sector Farm Service Sector (Implement dealers, chemical, sales, etc.) Producers (Farmers, ranchers, etc.) Consumers Processors (Manufacturers, bottlers, etc.) Pages 17-26

The Agricultural Sector • The processor sector creates value by converting agricultural commodities into products that consumers want • Processors change the form of the primary product • Processors can provide a storage function (i.e., aged cheddar) • Processors can provide transportation services • Processors add value to the raw agricultural commodity via the above activities Pages 17-26

The Agricultural Sector • Processors can be divided into two types: • Commodities processors – (i.e., milling wheat into flour for use as an input) • Food products processors - (i.e., cheese plant that transform milk into cheese for consumption) Processors (Manufacturers, bottlers, etc.) Food Products Commodities Pages 17-26

The Agricultural Sector • Sometimes a company engages in both types of processing activities • Hershey • Processes cocoa beans into powder (commodity) • Makes candy for direct sale (food product) • ConAgra Foods • Processes soybeans into oil, to make Blue Bonnet®, Fleischmann’s®, and Parkay® margarines (commodity) • Sells soybean oil directly to consumers Pages 17-26

The Agricultural Sector • Food product processors can be further divided into two categories • Processors that produce for retail food consumers • Those that produce for food service (via distributors) Pages 17-26

The Agricultural Sector Processors (Manufacturers, bottlers, etc.) Food Products Commodities At-Home Away from Home Pages 17-26

The Agricultural Sector Today, approximately 50% of food expenditures is spent on food eaten away-from-home Pages 17-26

The Agricultural Sector • A good example of a food product processor is the Coca-Cola Company • Purchases high-fructose corn sweetener (HFCS) from a commodity processor such as ADM or Cargill • Combines HFCS with other ingredients using their secret formula to produce Coke® • In cans and bottles for the retail market • In bulk for the food service industry Pages 17-26

The Agricultural Sector Farm Service Sector (Implement dealers, chemical, sales, etc.) Producers (Farmers, ranchers, etc.) Consumers Processors (Manufacturers, bottlers, etc.) Marketers (Distributors, retailers, etc.) Pages 17-26

The Agricultural Sector Processors (Manufacturers, bottlers, etc.) Food Products Commodities At-Home Away from Home Wholesalers Distributors Marketers Pages 17-26

The Agricultural Sector • The marketing sector creates value in the food industry by changing the time and place of food • Ties the producer and consumer sectors together • Coca-Cola plays the role of wholesaler and distributor in the marketing sector Pages 17-26

The Agricultural Sector Processors (Manufacturers, bottlers, etc.) Food Products Commodities At-Home Away from Home Sells to Final Consumer Wholesalers Distributors Restaurants, Institutions, etc Retailers

Coordination in Agriculture • Coordination: The communication system that conveys consumer wants to the producer • As shown above, marketers are companies that tie the final food consumer to the processor • Their job is to make certain that whatever the consumer wants is available when and where the consumer wants it Pages 17-26

Coordination in Agriculture • Traditionally, coordination has been accomplished by prices sending signals from one link in the marketing chain to the next • This is changing with management/strategic alliances replacing markets and the price system signaling the types of products to produce • i.e., Dairy Farmers of America and Dean Foods in the Northeast Pages 17-26

Coordination in Agriculture At the fluid processing level, large consolidated processors dominate the fluid milk industry. These include: (1) Dean Foods, which has a long term strategic alliance (full supply contracts) with DFA, and operates 12 plants in the Mideast and processes an estimated 250-300 million pounds of milk per month at these plants…... Prof. Ron Cotterill, Univ. of CT, 2005 Pages 17-26

Coordination in Agriculture • Historically most retail stores • Purchase products from wholesalers • Wholesalers • Purchased in bulk from processors • Sell in smaller batches to retailers • Many smaller retailers still use this system • Many larger retail chains combine wholesale and retail functions • Reduces transaction costs • Reduced costs can be • Passed on to consumers as lower prices or • Captured by the producer as higher profits Pages 17-26

Coordination in Agriculture • One of the the largest U.S. food retailer (by sales volume) is Kroger • $66 billion of food & other items/ year • Nearly 2,500 retail outlets. • Kroger does both wholesaling & food product processing • 42 plants making 3,000 products sold by the chain • This illustrates a dominant trend in the food system know as vertical integration • Several steps in the food system chain are placed under single management control

Coordination in Agriculture • Vertical integration allows a firm to coordinate the food system stages via internal management • Without integration: Coordination is accomplished by price signals sent to and received from various markets • With increased vertical integration • → An increase in the role of management in coordination • →A decline in the role of markets in the coordination of the food system

Coordination in Agriculture • What are the pros and cons of non-market coordination? • Markets and prices are highly visible and the consumer has many choices • Non-market coordination can be more efficient (particularly in large volumes) than market price coordination • →lower prices to the consumer

Coordination in Agriculture • What does the consumer want—more choice or lower prices? • The answer is clear when one compares the successes of Sears (“Good, better, and best”) vs. Wal-Mart (“Everyday low prices”) over the past 20 years • Wal-Mart has outpaced other competitors over this time period

Structure of Agriculture • Physical structure • Fewer number of farms but larger-sized • Increasing use of capital relative to labor • Increasing productivity per unit of input • Financial structure and performance • Volatility of net farm income reduced by subsidies although dairy is an exception • Declining debt use strengthens equity position • Recovering real estate values after sharp declines during financial crises of mid-1980s Pages 17-26

Expansion of Agricultural Production 30% ↑ Page 22

Declining Role of Hired Farm Labor Labor Capital Materials Page 21 Note: There is an error in the text

Increased Volatility for Some Sectors $/cwt This is the price used for cheese production Page 21

Structure of Agriculture • There is public concern that the family farm is giving way to large, impersonal, factory farms. • Farm operators are about 1.6% of the U.S. population • Characterizing attributes of the American farms and farmers → Study of farm structure. • What do farms in the U.S. look like today? Pages 17-26

Structure of Agriculture • In 1915: 6.5 million U.S. farms • Approximately 2 million farms today • The U.S. Department of Agriculture (USDA) defines a farm as: • Any establishment that produces (or should produce) at least $1,000 of farm products each year Pages 17-26

Structure of Agriculture • With roughly 305 million Americans, the average American farmer feeds himself and 152 others • Exports account for an additional 50 persons • The U.S. food chain can viewed as an inverted pyramid from producer to consumer • A very narrow base made up farm operators Pages 17-26

Structure of Agriculture • Popular press often asserts that farming is being taken over by large, corporate farms • 2 million U.S. farms, 98% are family farms • Family farms produce about 85% of the total agricultural production value • 90% are owned by sole proprietors, rest owned by partnerships or multifamily corp. • Non-family farms • 2.2% of all farm units • Produce 15% of total farm output Pages 17-26

Structure of Agriculture • Using the USDA U.S. farm typology • 14% or 300,000 are retired • 40% of farm operators listed primary occupation as a non-farm occupation • i.e. Hobby farm where operator works primarily off-farm & maintains farm as part of lifestyle • 38% listed occupation as farm with gross sales less then $250,000 • Profit rate of 3% →$7,500 profit • → 8% or 160,000 farms are large, economically viable enterprises • Account for about 2/3 of farm sales Pages 17-26

Structure of Agriculture • What is the typical American farm like? • Farm numbers: Most are either retirementhomes or hobby farms. • Almost are family farms: Only about 20,000 large, non-family farms • Clear trend among these food producers is toward fewer, larger farm units • Increasingly specialized in what they produce Pages 17-26

Structure of Agriculture • Lessons to be learned from the study of the structure of U.S. farms • There is no such thing as an average farm • Averages cover up more than they reveal Pages 17-26

Structure of Agriculture • Increasing public policy concerns as to the degree of concentration in food processing • Concentration: The degree to which a small number of firms account for a large market share • Example of recent USDA/Department of Justice hearings as to competitiveness in the U.S. food sector Pages 17-26

Structure of Agriculture http://www.justice.gov/atr/public/workshops/ag2010/index.htm Pages 17-26

Structure of Agriculture • 1st set of joint DOJ/USDA workshops to discuss competition and regulatory issues in the agriculture industry • Workshop goals: • Promote dialogue among interested parties • Foster learning with respect to appropriate legal and economic analyses of these issues • Listen to and learn from parties with real-world experience in the agric. sector Pages 17-26

Structure of Agriculture • A measure of concentration is the % of the total market accounted for by the four (or any other number) largest producers (CR4). • U.S. breakfast cereal industry has a CR4 of 87% • Virtually all baby food is produced by the three largest firms Pages 17-26

The U.S. Food and Fiber Industry