Chapter 2 Powerpoint - Agricultural & Applied Economics

Report
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
Apple Production
Appple Price
Year
Million
Lbs.
Output
Index
$/lb
Price
Index
1985
4,162
0.86
$0.66
0.91
1990
4,828
1.00
0.72
1.00
1995
5,289
1.10
0.84
1.16
2002
4,278
0.89
0.95
1.32
1990 is the
base year as
index set to 1.0
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….
Page 14
Nominal and Real Expenditures
Year
Nominal
Expenditures
(Mil. $)
CPI
(1982-84
=1.0)
Real
Expenditures
(Mil. $)
1980
120.3
0.824
145.99
1985
168.8
1.076
156.91
1990
248.5
1.307
190.10
1995
302.4
1.524
198.44
2002
385.8
1.722
224.03
1982-84 avg is
the base year
for the CPI
CPI was 52.4%
higher in 1995
than it was in
1982-84 period
198.44 = 302.4÷1.524
The increasing CPI
eroded the purchasing
power of the dollar….
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.)
Processors
(Manufacturers, bottlers, etc.)
Marketers
Consumers
(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
Compared to
24% for all of
agriculture
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 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 agricultural commoditys via above activities
$80/ lb
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)
 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.)
Commodities
Food Products
Pages 17-26
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
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.)
Commodities
Food Products
At-Home
Away from Home
Pages 17-26
The Agricultural Sector
% of Food E xpe nditure s A w a y From H om e
51.5
48.0
44.5
41.0
37.5
Today, approximately 50% of food
expenditures is spent on food eaten
away-from-home
34.0
30.5
27.0
08
20
04
20
00
20
96
19
92
19
88
19
84
19
80
19
76
19
72
19
68
19
64
19
19
60
23.5
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.)
Commodities
Food Products
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.)
Commodities
Sells to
Final Consumer
Food Products
At-Home
Away from Home
Wholesalers
Distributors
Retailers
Restaurants,
Institutions, etc
The Agricultural Sector
Farm Service Sector
(Implement dealers, chemical
sales, fertilizer sales etc.)
Producers
(Farmers, ranchers, etc.)
Processors
(Manufacturers, bottlers, etc.)
Marketers
Consumers
(Distributors, retailers, etc.)
Pages 17-26
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
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
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 significant 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
The Agricultural Sector
Farm Service Sector
Example of Vertical Integration
(Implement dealers, chemical
sales, fertilizer sales etc.)
Producers
(Farmers, ranchers, etc.)
Processors
(Manufacturers, bottlers, etc.)
Marketers
Consumers
(Distributors, retailers, etc.)
Pages 17-26
Coordination in Agriculture
What are the pros and cons of nonmarket 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
 Sears is searching for survival strategies
(e.g. acquisition of Lands End)
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
Structure of Agriculture
Millions
Number of U.S. Farms
4.0
3.8
3.5
3.3
3.0
2.8
2.5
2.3
2.0
Pages 17-26
Structure of Agriculture
Agricultural Production Index
30% ↑
Note: This expansion has
occurred with significant
decrease in farm numbers
Page 22
Structure of Agriculture
Proportion of U.S. Milk Production by Herd Size
35
< 100 HD
500-999
100-199 HD
1000-2000 HD
200-499 HD
2000+ HD
30
25
20
15
10
5
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Pages 17-26
Structure of Agriculture
 Structure also concerned with
use of various inputs
 Note decline in role of labor
Declining Role of Hired Farm Labor
Labor
Note: There is an error in the text
Capital
Materials
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 fed by U.S. agriculture
The U.S. food chain can viewed as an Consumers
inverted pyramid from producer to
consumer
 A very narrow base made up by farm
Farm Operators
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 retirement
homes 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
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
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
Structure of Agriculture
http://www.justice.gov/atr/public/workshops/ag2010/index.htm
Pages 17-26
Structure of Agriculture
First time there has been a 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 realworld 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 3
largest firms
Pages 17-26
Structure of Agriculture
Significant concentration in meat packing
Beef processing has a CR4 of 85%
 1 of these being foreign owned
Smaller competitors bought out via
consolidation
Large poultry producer, Tyson Foods, recently
bought the second-largest beef processor
 Some beef cattle producers have called for
Federal legislation to prevent any further
consolidation
Pages 17-26
Structure of Agriculture
Is concentration in the food industry bad?
Processors say consolidating into fewer, larger
firms allows them to cut costs
 They assert it benefits consumers
Processors assert that they need to consolidate
due to retail consolidation
Opponents argue that it provides the
processors with unusual market power
 Allows them to buy from farmers who have little
market power that border on exploitation
 Unequal bargaining power
 Why dairy cooperatives formed and today market
more than 75% of raw milk in the U.S.
Pages 17-26
Price Volatility in U.S. Agriculture
Average WI Price Recieved for Corn Grain ($/bu)
$8.00
$7.00
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
Page 21
Price Volatility in U.S. Agriculture
MW/BFP/Class III Prices ($/cwt)
$21.75
$20.00
$18.25
$16.50
$14.75
$13.00
$11.25
$9.50
$7.75
$6.00
$4.25
This is the price of milk used
for cheese manufacturing
Globalization of Agriculture
 Commodity processors tend to be on the
forefront of globalization
 Because demand for processing technologies
is truly global as we all need food to survive.
 The most successful commodity processors
are very internationalized with processing
facilities world-wide
Pages 17-26
Globalization of Agriculture
Globalization in food product processing
has not been as strong
Consumers have different tastes and
preferences across countries
i.e., final food product soybeans may be soy protein
meal in country A, tofu in country B, and a steak in
country C
Food product processors are making a
push to globalize
Processed food market growth dramatically
increasing in many developing countries
Contrast this with stagnant growth in the U.S.
Pages 17-26
Globalization of Agriculture
Criticism of Globalization
Food security—every country wants to be
certain its nutritional needs will be met.
 As an industry becomes globalized, individual
countries lose control to multinational companies
that may have different objectives
Global concentration: similar to the issue of
industrial concentration
 A Brazilian firm, the world’s largest beef
processor has acquired one of the largest U.S.
beef processors
Pages 17-26
Farm Profitability
 What do we mean by farm profitability?
Cash receipts from farm marketings (Price x
Quantity)
+ Government payments
+ Other income from farm sources
= Gross farm income
– Production expenses
= Nominal net farm income
÷ Broadly-based price deflator
= Real net farm income
Page 24
Instability of Net Farm Income
Real net farm income in
1983 had the same
purchasing power as 1933
Page 24
Financial Structure
 What do we mean by farm profitability?
Value of real estate assets (i.e., owned land,
buildings, etc.)
+ Value of non-real estate assets (i.e., tractor,
combines, stored grain, etc.
+ Value of financial assets (i.e., savings
accounts, IRA’s)
= Total assets
– Total liabilities or debt
= Equity or Net Worth
Page 25
Start of Farm
Financial crisis
 Low commodity prices
 High interest rates
Assets
Equity or
net worth
Liabilities
or debt
Page 25
Duration of Farm
Financial crisis
Assets
Equity or
net worth
Liabilities
or debt
Page 25
Marketing Bill
Marketing Bill:
The portion of food
expenditures associated with activities of firms
beyond the farm gate
More than 80% of every dollar spend on food is
represented by the marketing bill
 For every $100 spent at the supermarket…
 The farm service sector accounts for about $12
 The production sector (i.e., farmers), about $7
 The remaining $81 goes to processors of agricultural
commodities, and the marketing system that brings
food to your table
Pages 27-29
Where a food dollar goes
Only 19 percent of each dollar spent on food products goes
to farmers and ranchers…
Page 32
% of Food Purchase Dollar Returned to the Farm
Farm Value %
Trend Line: Explains 92% of variability
The % allocation across categories
has remained relatively constant
% of Food Purchase Dollar Returned to the Farm
Often referred to as Farm-Retail Margin
60
55
50
45
40
35
30
25
20
15
10
5
0
Cereals
Fruit
Cheese
Beef
Fresh Veg
Whole Milk
In Summary
Increasing role of capital
Productivity
Weak real profitability
Interrelationship among sectors in the food
and fiber industry
Farmers/ranchers share of food dollar
Chapter 3 starts a series of
three chapters that focus on the
demand curve for food and
fiber products….

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