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
April 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 = 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….
Page 14
Nominal and Real Expenditures
Nominal
Expenditures
(Mil. $)
CPI
(1982-84)
Real
Expenditures
(Mil. $)
Year
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.)
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.)
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 (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.)
Commodities
Food Products
At-Home
Away from Home
Pages 17-26
The Agricultural Sector
% of Food Expenditures Away From Home
51.5
48.0
44.5
41.0
37.5
34.0
30.5
27.0
Today, approximately 50% of food
expenditures is spent on food eaten
away-from-home
19
60
19
64
19
68
19
72
19
76
19
80
19
84
19
88
19
92
19
96
20
00
20
04
20
08
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
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 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
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
Note: There is an error in the text
Capital
Materials
Page 21
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Increased Volatility for Some Sectors
$/cwt
20
18
MW/BFP/Class III Prices ($/cwt)
22
This is the price used
for cheese production
16
14
12
10
8
6
4
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 retirement
homes 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 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 three
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 bad?
Processors say consolidating into fewer,
larger firms allows them to cut costs
 They assert it benefits consumers
Need to consolidate due to consolidation at
the retail level
Opponents argue that it provides the
processors with unusual market power
 Allows them to buy from farmers with little
market power at prices that border
on exploitation
 Unequal bargaining power
Pages 17-26
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 of 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
60
55
50
45
40
35
30
25
Cereals
Fruit
Cheese
20
15
Beef
Fresh Veg
Whole Milk
10
5
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
0
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….