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The U.S. Food and Fiber Industry. 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.

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The U.S. Food and Fiber Industry


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  1. The U.S. Food and FiberIndustry Chapter 2

  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

  3. Output and Price Indices 1.10 = 4,278÷4,828 Output 11% lower in 2002 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

  4. 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

  5. Characteristics of the Food and Fiber System

  6. 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

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

  8. 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

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

  10. 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

  11. 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

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

  13. Relative Importance of Dairy Farm Input Expenditures Compared to 24% for all of agriculture Source: Economic Research Service, USDA Data is for 2009

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

  15. 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

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

  17. The Agricultural Sector • The processor sector creates value by converting agricultural commodities into products that consumers want • Processors change form of primary product • Processors can provide a • storage function (i.e., Hook’s • 15 year old aged cheddar) • Processors can provide • transportation services • Value added to raw agricul- • turalcommoditysvia above activities $80/ lb Pages 17-26

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

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

  20. 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

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

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

  23. 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

  24. 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

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

  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

  27. 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

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

  29. Coordination in Agriculture • Coordination: The communication system that conveys consumer wants to the producer • 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

  30. 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 • Dairy Farmers of America (DFA): Major dairy farm cooperative controlling large amounts of raw milk • Dean Foods: Very large bottler of fluid milk • DFA and Dean Foods have entered into an exclusive supply arrangement in New England Pages 17-26

  31. 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

  32. 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

  33. 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 significant trend in the food system know as vertical integration • Several steps in the food system chain are placed under single management control

  34. 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

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

  36. 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

  37. 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 • Sears is searching for survival strategies (e.g. acquisition of Lands End)

  38. Structure of Agriculture • Physical structure of agricultural industry • 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

  39. Structure of Agriculture Number of U.S. Farms Pages 17-26

  40. Structure of Agriculture Agricultural Production Index 30% ↑ Note: This expansion has occurred with significant decrease in farm numbers Page 22

  41. Structure of Agriculture Proportion of U.S. Milk Production by Herd Size Pages 17-26

  42. Structure of Agriculture • Structure also concerned with use of various inputs • Note decline in role of labor Declining Role of Hired Farm Labor Materials Capital Labor Page 21 Note: There is an error in the text

  43. 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

  44. 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

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

  46. 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

  47. 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

  48. Structure of Agriculture • What is the typical American farm like? • Farm numbers: Most are either retirementhomes or hobby farms. • Almost all of the remaining 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

  49. 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 • Good example are Wisconsin dairy farms: • Grazers (i.e., low input technology)→Feedlot (purchase all feed) • Averages may cover up more than they reveal • When asked as to the average cost of production my response is that “it depends” • Type of technology used • Farm size Pages 17-26

  50. 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 2010 USDA/U.S. Department of Justice hearings as to competitiveness in the U.S. food sector Pages 17-26