The Current Industrialization of Agriculture

1
The Current Industrialization of Agriculture

• David Zilberman
• Department of Agricultural and Resource Economics
  
• University of California, Berkeley

2
Elements of Transition

• For 100 years U.S. farmers produced
  commodities to mass markets- but this is
  changing-
• Transition from commodities to differentiated
  products
• Transition from sales to markets to contracting
  and vertical integration.
• Adjustments to environmental concerns
  regulations
• Some processes continue
• Industrialization of production.especially in
  livestock.
• Increase in farm size and decline in of farms
• Increased importance of purchased inputs
• Globalization-pursuit of international
  marketsalliances

3
The Forces Shaping the Ag Economy

• High rates of technological change-resulting from
  public research (mostly biological),private
  innovation (mechanical).spillovers from other
  sectors ( power)
• yield per capita globally increased by 12 since
  1950
• Corn yield per acre in the U.S.

4
The Forces Shaping the Ag Economy-II

• Easily saturated (inelastic)Demand- 5-8
  increase in supply leads to about 10 price
  reduction-
• More output results in less income for farmers
• Random shocks (climate, diseases, economic
  situation)
• Increased relative costs of labor vs other inputs
  (during 20th century labor costs rose 5 times the
  CPI, while energy prices grow slower that the
  CPI, labor prices rose much faster than capital).
  
• Consumerism and environmentalism

5
The Chronic low Profitability Problem

• Random factors leads to price fluctuations.
• Technological changes inelastic demand lead to
  over supply, low prices and farm income problems.
• Corn prices in 2000 Dollars

6
Real value of U.S. corn(measured in thousands of
2000 dollars) is declining over time
7
Policy responses to the farm income problem

• Subsidization- policies that support income by
  raising prices, payment for land diversion etc.
• As the price of wheat drop from around
  3.8/Bushel in mid 90th to 2.1 in early 2000,
  Farm policy shifted from Freedom to Farm to the
  2002 subsidies intensive farm bill
• Protectionism-limits on certain food
  export(Sugar)
• Subsidies are exercised by U.S, Europe and Japan
• They harm developing countries (300
  Billions/year worth of protection)
• lead to over production and environmental
  damages.

8
Private strategies to enhance farm income-I

• Product differentiation -generate products to
  meet specific consumers needs and desires,
  including
• Time saving -Precut meats, packaged salads
• Enhanced taste -Tree ripen fruits, exotic
  varieties
• Health benefits -foods fortified with nutrients
• Preference for Specific production
  processes-Organic, range free, Kosher, etc -
• Supporting local farmers
• Differentiation is essential elements of
  strategies introducing organic food, biotech
  foods and convenience foods.

9
Producers care about the manner of food
production and processing.

• California Study of willingness to pay for
  pesticides free food finds
• 30 are not willing to pay extra
• 25 are willing to pay 5 extra
• 15 are willing to pay 10 extra
• 15 are willing to pay 15 extra
• 5 are willing to pay more than 30 extra
• Environmentalist and people with high incomes are
  willing to pay more, smokers are willing to pay
  less
• There is a gap between actual and stated
  willingness to pay (talk is cheap).
• Yet,there is a significant niche market for
  green products.
• Sale of organic is growing by about 15-20
  annually.

10
Contracting, integration and product
differentiation

• Differentiated products are innovations that
  require investment in product design and
  marketing
• They require investment in consumer
  education-about the product and broader issues
  (nutrition,environment)
• Investors are concerned with having sure supplies
  of the new ag products- and reduce supply
  uncertainty by vertical integration (produce the
  product themselves) or contracts.
• Differentiation is likely to increase contracting
  and integration and reduce production by farmers
  to final markets

11
More about ag contracts

• Contacting-where an integrator (provide some
  inputs to farmers, orders output and then sells
  it)- is useful mechanism to
• Introduce new innovations quickly
• Assure product quality
• Meet detailed marketing obligation.
• In most modern industries subcontractors play a
  major role in generating supply,that start
  occuring in agriculture.
• More than 50 of California.fruits and vegetables
  are sold through contracts arrangements
• The young Broiler industry grew fast because of
  contracts (no one wanted to grow birds without a
  contract from a buyer),and contracting in swine
  increases 50 of production.
• There is increase in contracting for uniquely
  specified products(organic pork, rare flowers or
  herbs)-here the internet helps.
• All new segments use contracting-from organics to
  biotech

12
Contracting promise and problems

• Contracting plays similar role to franchising-
  it allows the fast spread of a new practice, and
  take advantage of economics of scale in purchase
  of inputs, research and marketing
• For most parts rates of return of integrators is
  higher than those of farmers-but
• We do not observe the integrators that did not
  make it
• Integrators reap most of the return for risk and
  entrepreneurship
• Farmers may complain about contractual
  arrangement, but the queues to get a contract
  are long
• Contract arrangements are ignored in
  environmental regulations-integrators, who
  dictate much of the farms activities are not
  liable for its pollution- and they should.

13
Private strategies to enhance farm income-II

• Expand availability of products
• off season -Price of fruit at the beginning and
  end of the season may be three times the price of
  the same quality fruit in the midst of the
  season. Production is expanded (through direct
  investment or contracts) to locations that allow
  expanding the season
• Throughout the year-adoption of Kiwi by consumers
  was enhanced by its year around
  availability.
• To new locations - New shipping and information
  technologies, and varieties with longer shelf
  lives allow physical expansion of markets and
  better response to opportunities
• .

14
Private strategies to enhance farm income-III

• Provide recreation and environmental
  services,e.g.
• Dude ranches,Inns
• wild life habitat (rice field feed migrating
  birds in California)
• hunting rights
• Diversion and cleanup of water to wetlands or
  wild life reserves
• Reduce - intermediation- farmers receive less
  than 50 of consumer price-most go to
  intermediaries. Farmer price increases by
• Selling in farmer markets
• Direct sales to buyers cooperatives or clubs
• Direct sales to consumers using the internet

15
The evolution of the structure of agriculture

• Relative increase in labor prices and reduction
  of food prices were the major causes for
• migration out of farming
• increase capital intensification and size of
  farms.
• When net annual income of field crops is
  25-50/acre, you need between 800 to 1600 acres
  to earn 40.000 annually.
• The main action in food production is outside the
  farm On farm activities,have been reduced over
  time-
• human labor has been substituted with energy
• Increases in farm productivity are due Lab
  activities
• Marketing,processing and distribution are costly
  and complex
• No wonder ags income is much smaller than that
  of agribusiness

16
Ag structure present and future

• There are 2 million farms in the U.S.with size
  of 500 acres.
• The major players 300000 farms gross more than
  100.000 and 50000 Grossing more than
  500.000/yearcontrol.
• Most of the big farms are family owned.
• Annual Farm revenues of about 200 billion
  generates income of 20-40 billion.
• Agribusinesses (which sells inputs and market
  outputs) are grossing 8-10 times as
  agriculture. They are efficient, and labor and
  knowledge intensive. They expect to grow.
• Yet,transfer of 5 of agribusiness income to the
  farm will almost double farm revenues.