the u.s. food and fiber industry chapter 2. discussion topics review of index numbers and real value...

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

farmingDiscuss the role of other sectors in

the food and fiber industry

Output and Price Indices

1990 is the base year as index set to 1.0

1990 is the base year as index set to 1.0

Page 14Page 14

1.16 = 0.84÷0.72 Price 16% higher in 1995 that it was in 1990….

1.16 = 0.84÷0.72 Price 16% higher in 1995 that it was in 1990….

Apple Production Appple Price

YearMillion

Lbs.OutputIndex $/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

1.10 = 4,278÷4,828Output 11% lower in2002 than it was in1990….

1.10 = 4,278÷4,828Output 11% lower in2002 than it was in1990….

Nominal and Real Expenditures

CPI was 52.4% higher in 1995 than it was in1982-84 period

CPI was 52.4% higher in 1995 than it was in1982-84 period

1982-84 avg is the base year for the CPI

1982-84 avg is the base year for the CPI

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

198.44 = 302.4÷1.524 The increasing CPI eroded the purchasing power of the dollar….

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

Pages 17-26

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

Farm Service Sector(Implement dealers, chemical

sales, fertilizer sales etc.)

Processors(Manufacturers, bottlers, etc.)

Producers(Farmers, ranchers, etc.)

ConsumersMarketers

(Distributors, retailers, etc.)

Agricultural Sector Importance

Pages 17-26

An estimated one-fifth of all jobs in the U.S. are related to some aspect of the food industryIn 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

Consumers




Pages 17-26

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

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

Relative Importance of Farm Input ExpendituresRelative Importance of Farm Input Expenditures

Page 27

Agriculture sector as a whole Relative values depend on farm type

Relative Importance of Dairy Farm Input ExpendituresRelative Importance of Dairy Farm Input Expenditures

Source: Economic Research Service, USDAData is for 2009

Compared to 24% for all of agriculture


Pages 17-26

Farm Service Sector(Implement dealers, chemical, sales, etc.)


Consumers


Pages 17-26

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




Consumers


Pages 17-26

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-tural commoditys via above activities $80/ lb


Pages 17-26

Commodities


Food Products

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

processingFood products processors - (i.e., cheese plant

that transform milk into cheese for direct consumption)


Pages 17-26

Sometimes a company engages in both types of processing activitiesHershey

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

Food product processors can be further divided into two categoriesProcessors that produce for retail food

consumersThose that produce for food service (via

distributors)


Pages 17-26

Commodities


At-Home Away from Home

Food Products


Pages 17-26

% of Food Expenditures Away From Home

23.5

27.0

30.5

34.0

37.5

41.0

44.5

48.0

51.5

Today, approximately 50% of food expenditures is spent on food eaten away-from-home

Today, approximately 50% of food expenditures is spent on food eaten away-from-home


Pages 17-26

A good example of a food product processor is the Coca-Cola CompanyPurchases 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




Consumers

Marketers(Distributors, retailers, etc.)


Pages 17-26

Commodities


Food Products


Wholesalers Distributors

Marketers


Pages 17-26

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


Commodities


Food Products


Wholesalers Distributors

Retailers Restaurants, Institutions, etc

Sells toFinal Consumer


Pages 17-26





ConsumersMarketers


Coordination in Agriculture

Pages 17-26

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

Traditionally, coordination has been accomplished by prices sending signals from one link in the marketing chain to the nextThis 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

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

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

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


One of the the largest U.S. food retailer (by sales volume) is Kroger$66 billion of food & other items/ yearNearly 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 integrationSeveral steps in the food system chain are

placed under single management control

Coordination in AgricultureVertical 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


Pages 17-26





ConsumersMarketers


Example of Vertical Integration


What are the pros and cons of non-market coordination? Markets and prices are highly visible and

the consumer has many choicesNon-market coordination can be more

efficient (particularly in large volumes) than market price coordination →lower prices to the consumer


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)

Physical structure of agricultural industryFewer number of farms but larger-sizedIncreasing use of capital relative to laborIncreasing productivity per unit of input

Financial structure and performanceVolatility of net farm income reduced by

subsidies although dairy is an exceptionDeclining debt use strengthens equity positionRecovering real estate values after sharp

declines during financial crises of mid-1980s

Pages 17-26

Structure of Agriculture

Pages 17-26


2.0

2.3

2.5

2.8

3.0

3.3

3.5

3.8

4.0

Mil

lion

s

Number of U.S. Farms

30% ↑


Note: This expansion has occurred with significant decrease in farm numbers

Agricultural Production Index

Pages 17-26


Proportion of U.S. Milk Production by Herd Size

5

10

15

20

25

30

35

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

< 100 HD 100-199 HD 200-499 HD

500-999 1000-2000 HD 2000+ HD

Declining Role of Hired Farm LaborDeclining Role of Hired Farm Labor

Labor Capital Materials

Note: There is an error in the text


Structure also concerned with use of various inputs Note decline in role of labor


Pages 17-26

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

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

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 Farm Operators

Consumers


Pages 17-26

Popular press often asserts that farming is being taken over by large, corporate farms2 million U.S. farms, 98% are family farmsFamily farms produce about 85% of the

total agricultural production value90% are owned by sole proprietors, rest

owned by partnerships or multifamily corp.

Non-family farms2.2% of all farm unitsProduce 15% of total farm output


Pages 17-26

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

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 unitsIncreasingly specialized in what they produce


Pages 17-26

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

Increasing public policy concerns as to the degree of concentration in food processingConcentration: 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

http://www.justice.gov/atr/public/workshops/ag2010/index.htmhttp://www.justice.gov/atr/public/workshops/ag2010/index.htm


Pages 17-26

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 partiesFoster learning with respect to appropriate

legal and economic analyses of these issuesListen to and learn from parties with real-

world experience in the agric. sector


Pages 17-26

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

Significant concentration in meat packingBeef processing has a CR4 of 85%

1 of these being foreign ownedSmaller competitors bought out via

consolidationLarge 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

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.

Price Volatility in U.S. Agriculture

Page 21

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

Average WI Price Recieved for Corn Grain ($/bu)

$4.25

$6.00

$7.75

$9.50

$11.25

$13.00

$14.75

$16.50

$18.25

$20.00

$21.75MW/BFP/Class III Prices ($/cwt)

This is the price of milk used for cheese manufacturing

This is the price of milk used for cheese manufacturing

Price Volatility in U.S. Agriculture

Globalization of Agriculture

Pages 17-26

Commodity processors tend to be on the forefront of globalizationBecause 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 in food product processing has not been as strong Consumers have different tastes and

preferences across countriesi.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 globalizeProcessed food market growth dramatically

increasing in many developing countriesContrast this with stagnant growth in the U.S.


Pages 17-26

Criticism of GlobalizationFood 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

Farm Profitability What do we mean by farm profitability?

Page 24

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

Instability of Net Farm IncomeInstability of Net Farm Income

Real net farm income in 1983 had the same purchasing power as 1933

Real net farm income in 1983 had the same purchasing power as 1933

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 WorthPage 25

Liabilitiesor debt

Liabilitiesor debt

AssetsAssets

Equity or net worth

Equity or net worth

Start of FarmFinancial crisis

Start of FarmFinancial crisis

Low commodity prices High interest rates

Duration of FarmFinancial crisis

Duration of FarmFinancial crisis

Liabilitiesor debt

Liabilitiesor debt

AssetsAssets

Equity or net worth

Equity or net worth

Marketing BillMarketing 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 $12The production sector (i.e., farmers), about $7The remaining $81 goes to processors of agricultural

commodities, and the marketing system that bringsfood to your table

Pages 27-29

Only 19 percent of each dollar spent on food products goesto farmers and ranchers…

Only 19 percent of each dollar spent on food products goesto farmers and ranchers…

Page 32

Where a food dollar goesWhere a food dollar goes

% of Food Purchase Dollar Returned to the Farm% of Food Purchase Dollar Returned to the Farm

Trend Line: Explains 92% of variability

Farm Value %

The % allocation across categories has remained relatively constant

% of Food Purchase Dollar Returned to the Farm% of Food Purchase Dollar Returned to the Farm

0

5

10

15

20

25

30

35

40

45

50

55

60

Cereals BeefFruit Fresh VegCheese Whole Milk

Often referred to as Farm-Retail Margin

In SummaryIncreasing role of capitalProductivityWeak real profitabilityInterrelationship among sectors in the food

and fiber industryFarmers/ranchers share of food dollar

Chapter 3 starts a series of three chapters that focus on the demand curve for food and fiber products….

the u.s. food and fiber industry chapter 2. discussion topics review of index numbers and real value...

Documents

food industry slide

agricultural sector

farm type slide

fiber industry slide

agricultural food industry

farm type agriculture

localized sector

fiber system slide