Trends in Agriculture
North Dakota has one railroad lift bridge; it is briefly described at http://www.ghostsofnorthdakota.com/2011/07/03/fairview-lift-bridge-and-tunnel/. It is interesting that it was never used. Why not? How does the experience of North Dakota's railroad lift bridge relate to agriculture and business management? HINT -- why was the lift bridge never used? ANOTHER HINT -- what type of boats would have passed under the bridge when it was lifted? What happened to those boats (that mode of transportation) when the railroad became available on the west side of the river? What might we learn from that experience?
The next several sections are an opportunity to consider 1) trends in agriculture, 2) causes of these trends in agriculture, 3) implications of these trends, and 4) opportunities arising from these trends. Economic concepts that are reviewed and applied as part of this discussion include 1) determinants of supply and demand, and the characteristics of perfect competition. The impacts of trade, and the ideas of ability/capacity to assume risk and willingness to assume risk also are mentioned.
The discussion begins with some general comments about agriculture.
Agriculture in the 21st Century
Our task is to think about decision making in agriculture in the 21st century, especially the first half of the 21st century when most of you as young adults will have your careers. But to think about the future, it often is helpful to review the past -- looking for trends and then to envision the future assuming the trends continue, or at least, they provide some insight.
We could review the past 10,000 years of food production, but it might be adequate to begin our review 200 years ago in the early 19th century and then identify several major events or trends since the latter part of the 1800s.
Agriculture is more than farming and ranching. The farms and ranches, vineyards, orchards, feedlots, and other locations are the production sector of agriculture; that is where agricultural commodities are produced. But agriculture also includes the businesses that "move" agricultural commodities to consumers; these include food processors that transform agricultural commodities into food products, the transportation sector within agriculture, rural elevators, the retail sector that sells food to consumers for final preparation and consumption at home, as well as the food service sector that prepares food for consumption away from home. Agriculture also includes the businesses that provide inputs for agriculture producers, such as, equipment manufacturers, pesticide and fertilizer suppliers, seed companies, storage businesses, research firms, businesses that provide marketing information and financing -- and the list goes on.
- As discussed below, the number of farmers in the United States declined since the 1940s, but what has happened to the number of persons in agribusiness? Has the total employment in agriculture declined in the past 80 years, or has it changed?
A common phrase used to describe issues relating to food safety is "from farm to table," implying that steps need to be taken throughout the industry to assure a safe food supply. But that interconnection among the sectors of the food/agriculture industry may be an accurate descriptor for all issues relating to food, not just food safety issues. Some suggest that the phrase "from farm to table" should be altered to describe the critical role of natural resources and the impact the industry and consumers can have on our natural resources of water, soil and air. Continuing this thought, it may be helpful to describe the process of feeding the world not as having a beginning and ending point, but as an ongoing circular process where each stage or step can impact the overall system.
In addition, agriculture in the 21st century is more than food; it is crucial that we do not overlook the role of agriculture in the expanding renewable energy industry. For example, see U.S. Ethanol Expansion Driving Changes Throughout the Agricultural Sector.
Also, what might be the role of agriculture in producing functional foods in the future?
- Functional foods are "... processed foods containing ingredients that aid specific bodily functions in addition to being nutritious ..."; they provide "... an additional physiological benefit beyond that of meeting basic nutritional needs."
- See "Functional Foods: Their Role in Disease Prevention and Health Promotion"
Similarly, what might be the role of agriculture in the production of adhesives, pharmaceuticals, manufactured fibers, and other industrial products? Can agriculture replace petroleum as a feedstock for high value products, especially products that are meant for human consumption?
Even though much of the focus of these educational materials is on the production sector of agriculture, it is important to remember that the agriculture industry is a complex system of inter-related, interacting businesses.
As agriculture expands its role into the energy industry and beyond, is it appropriate to think of agriculture as a biological way to capture sunlight to meet current food, energy and other needs, rather than relying extensively on past sunlight that is stored as fossil fuels?
Issues related to agriculture extend beyond food and energy. They also encompass the rural areas where much of production agriculture occurs. We revisit this topic in a subsequent section.
Agriculture is a Dynamic Industry
For persons familiar with production agriculture, an almost immediate comment, when asked "how is agriculture changing" is that farms are becoming larger and there are fewer farm businesses. But this one descriptor, although important, does not fully explain what is happening. Some history may be helpful.
Declining Number of Farmers
For much of the world until the mid-1800s, most persons were involved in agriculture. For example in the United States, 90% of the population were farmers in 1790. Essentially, people produced the food they consumed. See http://www.agclassroom.org/gan/timeline/farmers_land.htm. A century later (1890), farmers were 43% of the labor force. In another century (1990), farmers were 2.6% of the labor force. The following table provides additional detail about changes in the production sector of the U.S. agriculture industry.
|Year||% of Population Farming||Farm Population||Number of Farms|
What caused this shift that allowed people to do something other than produce their own food? Restated, an increasing number of people in the past 200 years (a relatively short time from a historical perspective) have not produced their food, but instead rely on being able to purchase food from someone else. What happened?
HINT -- what has been the trend in technology and how does technology impact our tasks? What technologies are we thinking about?
Cost of Food
Before answering those questions, let us change our focus for a moment and think about the consumption of food. Over time, the portion of income used for food has been declining for persons living in the United States (and other developed nations). See food expenditures as a percent of income; at Economic Research Service. Food CPI and Expenditures: Table 7, USDA. Also see Despite Higher Food Prices, Percent of U.S. Income Spent on Food Remains Constant.
|Food expenditures by [U.S.] families and individuals as a share of disposable personal income|
|Year||Total||At home||Away from home|
Similar data are available for numerous nations; see http://www.ers.usda.gov/briefing/cpifoodandexpenditures/Data/Expenditures_tables/. Click on a year (e.g., 2010) for Table 97 (near the bottom of the web page) to open an Excel spreadsheet.
Note that these data are for “at home” food expenditures only; they do not include “away from home” food expenditures. I expect that for some nations, “away from home” food expenditures are insignificant; for other nations (e.g., United States), “away from home” food expenditures can be substantial (suggestion: review the table on the other web page which reports that for 2010 the United States spent 41.5% (3.9% of 9.4%) of its food expenditures “away from home”).
How do you expect individuals in nations that spend a substantial portion of their income on food to view the food industry?
What is happening to allow this trend in food expenditures? Does the cause of this trend in food expenditures bear any relationship to the cause of the trend of decreasing farm population?
HINT -- Is consumer income rising? Is technology to produce, process, store and transport food advancing?
Several Historical Points
The following excerpts from USDA publications may help us gain a sense of where we have been, where we are, and where we may be going.
- "The U.S. economy generally prospered during the first two decades of [the 20th] century. The agricultural sector was also generally prosperous, with the 1910-14 period often being regarded as the golden age of American agriculture (with the subsequent parity price formula being based on these years), which was then followed by a boom during World War I.
- "Concerns about farmer bankruptcy were heightened from 1920 through the Great Depression of the 1930’s. Commodity prices collapsed after 1920. Sharply lower incomes left many farmers, who had borrowed to finance land acquisition and improvements before 1920, unable to repay their loans. Farm-sector problems continued or were intensified by the general economic collapse in 1929, leading to the Great Depression and widespread adverse weather problems affecting agriculture in the 1930’s. Nominal farmland prices fell from a post-World War I high of $69 per acre in 1920 to a Great Depression low of $30 per acre in 1933. Per acre farmland values then slowly increased in most subsequent years, but it was 1951 before the per acre value exceeded that of 1920." [excerpts from Are Farmer Bankruptcies A Good Indicator of Rural Financial Stress?]
- "In the early 20th Century we had a golden age for agriculture from 1910 through World War I until 1920. This came about at the time of the closing of the frontier, with immigrants flooding the cities and with industrialization employing growing urban populations and drawing rural folk from the land. This collapsed with world food surpluses in 1921. We tried to deal with the collapse with the Agricultural Adjustment Act, soil conservation programs, and other means, but it was World War II that provided the ultimate demand stimulus for improvement." [excerpt from Technology and Structural Changes in Agriculture Since 1900]
- "The relative decline in the farmers' position had begun in the summer of 1920 when the United States began the transition from a debtor to a creditor Nation after World War I, resulting in a continued loss in the volume and price of exports. Thus, for a decade farmers were caught in a serious squeeze between the prices they received and the prices they had to pay before the situation became critical and a major element of the Depression.
- "Farm journals and farm organizations had, since the 1920s, been advising farmers to control production on a voluntary basis. Attempts were made in some areas to organize crop withholding movements on the theory that speculative manipulation caused price declines. When these attempts proved to be unsuccessful, farmers turned to the more formal organization of cooperative marketing for staple crops. After voluntary organizations of wheat and livestock producers collapsed, farmers began campaigns for Government assistance in solving the farm problem.
- "A number of programs were proposed, but the one which gained widespread support became known as the McNary-Haugen Plan after it was introduced into Congress in 1924 by Senator Charles L. McNary of Oregon and Representative Gilbert N. Haugen of Iowa. The plan was first promoted by George N. Peek and Hugh S. Johnson, managers of the Moline Plow Company. Their company had failed because of the farm depression. As Peek said, "You can't sell a plow to a busted customer." Both Peek and Johnson had worked in the War Industries Board during World War I and, based on this experience, felt Government action could provide economic stability. At the convention of the American Farm Bureau Federation in late 1921, Peek and Johnson presented a plan for selling farm products for domestic consumption at a fair exchange value and surplus products abroad at a world price. With modifications, the McNary-Haugen bill was before Congress from 1924 until May 23, 1928, when it was vetoed for the second time by President Coolidge." [excerpts from History of Agricultural Price-Support and Adjustment Programs, 1933-84]
- How could the years before World War I (1910-1914) be the "Golden Age of Agriculture"? What was happening? Why would the years of World War I not be the primary years of the "Golden Age"? How could U.S. agriculture begin to lose some of its "shine" during World War I when we were feeding Europe as well as ourselves?
- HINT -- when did the industrial revolution begin to offer non-farm (higher income?) employment opportunities? When were farmers able to widely adopt advancing production technology, such as tractors and field equipment?
- HINT -- the industrial revolution offered urban employment BEFORE agricultural production technology hit full stride. Consumer income (as a result of the industrial revolution and resulting urban employment) increased faster than the supply of food. What would happen to food prices and farm profitability? Would both increase?
- Why was there such excess production after World War I (1920s)? Was it more than "the return of Europe to farming"? How could Europe resume production so quickly?
- HINT -- when did agriculture production technology become available and when did farmers have enough profit to invest in this technology? NOTE -- the answers to this question is a date that FOLLOWS the industrial revolution. What happens to the supply of food when new technology is being used to increase production? What happens to the price of food and the profits for farmers if production technology is increasing the supply of food more quickly than consumers are increasing their demand for food? Downward pressure on agricultural prices and farm profit?
- If U.S. agriculture was already financially stressed in the 1920s, why did it take until the 1930s for Congress to enact "ag" legislation? How does the answer to that question relate to U.S. agriculture policy in the 21st century?
- Did Congress respond to consumer needs in the 1930s rather than producer needs in the 1920s?
- Do not overlook the socialist movements occurring in the 1930s in nations around the world, especially in Europe. Did Congress respond to consumer needs in the 1930s in an attempt to protect the U.S. form of government?
- Do not overlook the factors that led to the demise of the U.S.S.R. in the late 1980s. Were Russians hungry, or was it a perception that "things could be better"? HINT -- a perception that "things could be better" is enough to overthrow governments.
What thoughts can we glean from others?
The discussion has not yet answered the question of what is driving or causing these changes in production agriculture and consumers.
See: The Executive Summary of Food and Agricultural Policy -- Taking Stock for the New Century by USDA, September 2001. Pages 7-20 of the executive summary (pdf) are required reading.
- Pay special attention to the following topics: consumer-driven agriculture, a global economy, technological innovation, agricultural diversity, implications of change, trade expansion, conservation and environment, rural communities.
Major topics of the full report are
- The Evolving Food and Agriculture System
- Trade Expansion Is Critical
- Farm Sector Policy
- Enhancing the Infrastructure
- Conservation and the Environment
- Rural Communities
- Nutrition and Food Assistance
Also see: The U.S. Food Marketing System, 2002 ERS Agricultural Economic Report No. AER811. August 2002
- Abstract -- This report focuses on recent trends in the food supply chain. Chapters on food manufacturing, wholesaling, grocery retailing, and food service provide a detailed overview of structure, performance, information systems, new technology, and foreign direct investments. The report also contains a comprehensive set of appendix tables containing sales, concentration, trade, productivity, and other indicators. At the time of publication, most of the data sets used in this report included data through the year 2000.
- The Introduction is required reading
- Selected excerpts:
- Efficiency gains in the food marketing system continue to result in abundant supplies of a variety of affordable food products.
- [M]erger and acquisition activity continues to result in increased concentration.
- Buyer-seller relationships are changing throughout the food supply chain as stages become increasingly interdependent.
- The food marketing system continues to embrace new technology that improves the flow of information.
- Competitive pressures are mounting for farmers to deliver the right types of products at the right time. Retailers are demanding a variety of high-quality products (for example, organic produce or exceptionally lean pork) delivered in a timely fashion. This demand increases the importance of agricultural product differentiation and precise information.
- International trends in trade and foreign direct investment offer U.S. food marketers an alternative to the slowly growing domestic food market. It also leaves the U.S. food marketing system increasingly exposed to foreign economic developments, policies, and changing consumer preferences.
- Selected excerpts:
Major topics in this 2002 report are
- Food Manufacturing
- Food Wholesaling
- Food Retailing
- Food service
- These topics do not encompass the farm input sectors
What Did the Study Find?
"The study shows that nontraditional food retailers increased their share of food sales for at-home use from 17.1 percent in 1994 to 31.6 percent in 2005. These companies were able to position themselves within the food industry by creating new shopping formats that appealed to consumers and by lowering costs. The study also found that foodservice facilities (restaurants, for example) continued to increase their share of all food sales, from 46.1 percent in 1994 to 48.5 percent in 2005, by offering new products and services.
"In response to competition from nontraditional food retailers and the foodservice segment, conventional grocery retailers are employing their own cost-cutting and differentiation strategies. Cost-cutting tactics include supply chain initiatives such as data-sharing activities. For instance, through UCCnet, an Internet platform, food retailers and suppliers can exchange information that facilitates product delivery and reduces out-of-stock items and excess inventory. Another cost-saving strategy is to restructure operations to focus on the most profitable stores and geographic areas.
"A main cost-cutting strategy of traditional grocery retailers over the past 10 years has been to consolidate through mergers and takeovers. This development may, in turn, lead food processors to consolidate to meet the largescale needs of grocery retail chains. Some large wholesalers—concerned about the ability of the smaller, independent food retailers that they supply to compete with retail chains and stay in business—are vertically integrating into retailing by acquiring stores of their own.
"Primary differentiation strategies include expanded project offerings—new food product introductions continue to set records, outpacing nonfood packaged goods—along with updated store designs and technologies to improve service. Food companies are also adopting some less conventional methods, focusing on new ways of image enhancement—for instance, publicizing their initiatives to advance social agendas beyond those required by law. The companies are also using new advertising approaches. A shift from TV advertising to other venues, such as magazines, the Internet, and video games, reflects a move from mass to individualized marketing. This trend is also reflected in new product labels designed to appeal to consumer self-image (for instance, with “upscale” terms such as premium and gourmet)."
Consider: Vertical Coordination by Food Firms Rising, Along with Contract Production USDA's Economic Research Service; AIB-720, June 1996, summary of report is required reading. The report describes agriculture as shifting from an open production system to a system of contract production or vertical integration. Consider the following paraphrased excerpts.
- The food industry has traditionally operated in an open production system (i.e., a firm purchases a commodity from a producer at a market price determined at the time of purchase). However, more discriminating consumers, plus new technological developments that allow farm product differentiation, are contributing to a decrease in open production and an increase in contract production and vertical integration.
- Contract production involves a firm committing to purchase a commodity from a producer at a price formula established in advance of the purchase. Vertical integration means a single firm controls the flow of a commodity across two or more stages of food production.
New Directions in Global Food Markets
- "Although consumer diets are being upgraded globally, food purchase patterns vary across countries based on income levels. Developing countries are registering rapid increases in retail sales of high-value foods, while developed countries are seeing a rise in sales of products that meet consumer demands for variety, food safety, and quality. To meet these increasingly varied needs, multinational food retailers and manufacturers are expanding their presence in developing countries, and food retailers and suppliers are adding value and differentiating their products in developed countries. The ongoing changes are driving food supply chains to adopt closer coordination between producers and retailers to facilitate customizing products to meet consumer demands. Even as the food industry is becoming more global, food markets are increasingly responding to consumer preferences at a local level and catering to specific demands in each market."
The 20th Century Transformation of U.S. Agriculture and Farm Policy
- "As the new century gets underway, technological development and market integration remain forces of change, and their influence, along with that of consumers, appears likely to continue. The structure of farming continues to move toward fewer, larger operations producing the bulk of farm commodities, complemented by a growing number of smaller farms earning most of their income from off-farm sources, all increasingly affected by global events."
These publications are now several years old. What is the impact of recent events, such as declining value of the dollar and expanded use of renewable energy based on agricultural commodities? What is the impact of increasing wealth for many people, such as in China? What is allowing these people to substantially increase their income at this time?
Now is a good time to review the texts: Farm Management in the Twenty-First Century; Kay, et al, Chapter 1 and Economics of Farm Management in a Global Setting, Olson, pp. 1-4.
- As you read the texts, carefully consider the importance that a manager knows the "environment" in which the business operates. The manager needs to understand the internal operations of the business and the external forces that impact the business. Chapter 1 discusses several topics in both of these categories.
- Kay, et al draw our attention to: New Technology, Information Age, Controlling Assets, Human Resources, Producing to Meet Consumer Demands, Collaboration, Contracting and Vertical Integration, Environmental and Health Concerns, and Globalization
- What do these topics have in common?
- Why are these topics important today? Were they important in the past? If no, what has changed to cause the topics to be important today?
- HINT -- Are agricultural producers and other agribusinesses becoming less "independent?"
How to think about the trends in Agriculture
- As we discuss trends in agriculture/food industry, it also is appropriate to think about the strategic planning process and decision making process discussed in other sections. Our vision for the future of the agriculture industry is "background" or "foundation" in developing a vision for our business.
- Likewise, it is appropriate to review relevant economic concepts, such as the determinants of demand and supply and the characteristics of perfect competition. This second topic (i.e., level of competition) also considers how technology impacts the level of competition, the implications of perfect and imperfect competition, and ideas on why and how business managers may want to intentionally break out of perfect competition.
- Where can managers find credible information about trends in agriculture, the food industry, consumers and food consumption, emerging technologies, and rural economies?
Summary of First Part
- Agriculture is more than farming and agricultural commodities. It is food, energy and fiber; it is the businesses that transform agricultural commodities into consumer products. It is the businesses that assist agricultural producers use natural resources to produce agricultural commodities.
- Agriculture is using biological processes to capture today's sunshine to produce food, energy, fiber and other products to meet the needs and desires of today's consumers.
- Agriculture is changing. Agriculture does more than provide basic foods; it now provides energy, functional foods and more.
- The population is shifting from rural to urban; or from food production to producing other products.
- Food is becoming a smaller part of our total consumption.
- These trends are global trends; they are not limited to the United States.
What is causing the trends in the agriculture industry?
Kay, et al. drew our attention to the following topics:
- Advancing technology (production, information, transportation)
- Increased reliance on information
- Importance of controlling economic resources
- Understanding how to direct human resources
- Understanding consumer demand
- Recognizing the integration of businesses
- Recognizing the impact of concerns about the environment, food safety, food availability and food cost
- Appreciating the implications of globalization.
Does this list help identify causes of trends in agriculture?
Let's think about them in a little more detail.
- Advancing Technologies-- What impact does technology have on agricultural producers and other agribusinesses? What impact does technology have on consumers?
- When considering these questions, briefly describe the TYPES of technology you are thinking about? HINT -- does it help our thought process to think about technology as production/processing technology, communication/information technology, and transportation/storage technology?
- Economic theory suggests that advances in production technology allow businesses to produce more output from the same quantity of input.
- Is production increasing as technology advances?
- What does additional production mean for consumers? Lower prices?
- What does additional production mean for the businesses that are adopting the technology? Lower cost? More production? Lower prices? What might be the impact on profit?
- What does additional production mean for businesses that do not adopt the new production technology? Lower prices without reduction in cost or increase in production? Lower profit?
- What does advancing communication technology mean for producers who use that technology? Increased awareness of market opportunities? What does advancing communication technology mean for consumers? Increased awareness of supply? What does advancing communication technology mean for businesses that do not use it? Does economic theory help answer these questions?
- What impact does advances in food processing, storage and transportation technologies have on consumers? What impact does these technologies have agricultural or food businesses? Increased access to markets? What impact does it have on businesses that do not adopt the technology?
- Information Age -- what does "the information age" mean? Is information becoming more available?
- How does information impact consumers? More information about supply? How does information impact producers -- both directly and indirectly? More information about market opportunities? More information about production technologies? What impact does information have on the level of competition?
- What business strategies might producers consider adopting as a result of increased availability of information?
- What are the sources for the information that consumers and producers use? Public? Private but availability to anyone willing to pay for it? Private and unavailable except to those chosen by the holder of the information.
- Financial Management/Controlling Assets -- why would a manager want to "control" assets? Business needs economic resources in order to receive revenue, whether the resource is owned by the business or owned by someone else who allows the business to use (lease, hire, borrow, etc) the resource. Why do business managers need to manage the business' finances? To assure the business is managing cost and paying bills on time?
- Human Resources -- fewer businesses are one-person operations? How can a manager enhance the productivity of the business' workers? Is addressing human resources a more pressing issue today than it may have been in the past? Why?
- Producing to Meet Consumer Demands -- will consumers buy what is available or will consumers buy what they want? Why? How does this impact businesses? What determines which products consumers can access (HINT -- think about the points you considered under the topic of New Technology)? Will businesses produce what they want to produce or will they produce what consumers want to purchase/consume? HINT -- consider the portion of income that is spent on food?
- Does agriculture involve more than producing food?
- Contracting and Vertical Integration -- is this a risk management strategy? What risks? Is this a strategy for managing information? What information? HINT -- goal of integration is not limited to managing inventory? HINT -- does integration help producers know what consumers are purchasing?
- Environmental and Health Concerns -- is there more concern about environment and health today? Why? HINT -- consider again the portion of income that is spent on food. Do concerns about environment, health and safe food pose a challenge for producers or an opportunity? Why?
- Cost of Food and Fuel -- how might agricultural managers respond to an outcry about rising consumer prices for food and fuel?
- Globalization -- what is causing the global economy and what is the consequence of a global economy? HINT -- review the points considered in the discussion about New Technology; also review the thoughts developed as part of Producing to Meet Consumer Demands. What is the outcome of globalization? HINT -- consumers seeking new supplies and producers seeking new consumers? Is everyone supportive of trade? HINT -- who might want trade (two groups) and who might NOT want trade (2 groups)?
What do we know about the agriculture industry? Many different types of activities and many different types of businesses. What are some of the characteristics of agriculture/food industry?
- What are some of the characteristics of production agriculture? Biological processes and dependent on weather (production risk?); reliant on land resource; often closely-held businesses; generally facing perfect competition.
- What are the characteristics of other agribusinesses? Do they rely on private or proprietary information and technology? Do they face "less than perfect competition?" Do they face the risk that their differentiated product may not align with consumers' tastes and preferences?
- How do these characteristics of the ag/food industry impact a manager's decision making process?
- Is the food industry becoming a "team" or "system's" approach?
Do we need to also think about rural issues?
- See Enhanced quality of life for rural AmericansEconomic Research Service USDA (ERS): links to numerous other publications and articles addressing rural America.
- This web site is valuable only if you are willing to read -- take the time to read and think. This self-discipline is a necessity for all professionals in the information age.
Do we need to think about consumers and others?
Agriculture ranges from small firms, to large firms, to huge multi-national businesses. It encompasses government agencies at the local, state and federal level. Agriculture includes organizations interested in the well-being of the industry (such as producer groups) to organizations interested in the health and nutrition of people.
As you take this course, you may have some thoughts as to where in the complex industry you will spend all or part of your career; others in the class may not have any idea but are excited about the range of opportunities. Regardless of where your opportunities may lead, you need to understand the challenge of providing food for the world's population today and in the future. Increasingly as individuals, we will not feed ourselves; that is, "I will not raise the food I eat." Instead, all of us will rely on a vast array of interactions and transactions involving numerous entities and vast distances to provide our food. The challenge is how do we make individual, as well as collective decisions to accomplish the common goal of assuring that people are fed.
Revisit Kay Chapter 1. Key points from this chapter include
- Production agriculture is influenced by production technology and the owners' goals.
- Production agriculture is evolving to have high volume commodity producers and low volume product producers; is this observation still true today?
- Specialization offers opportunity; but how does this reconcile with the strategy of managing risk by diversifying?
- Managing information within the firm, sharing information with collaborating businesses, analyzing information about global opportunities;
- Working with others; how does this reconcile with the pride of being independent?
- Influence (impact) of consumer demand for food products.
- Society's expectations of business operations -- environmentally sound, safe food, nutritious food, etc.
- Advancing production and information technology.
Consider some key points about small business management and globalization:
- Entrepreneurship -- initiating the business, organizing the resources, taking the risks.
- Consumers want service; industries, economies, and businesses are becoming global; competition is increasing; technology is advancing.
- Personality traits of small business owners/managers -- internal locus of control, high energy level, need to achieve, self-confidence, awareness of passing time, tolerance for ambiguity.
- What about willingness and ability to assume risk?
- Impact of advances in technology and communication (also transportation).
- No one is isolated.
- Increased complexity and competition.
- What about increased opportunity?
Causes of Trends in Agriculture -- can we finally answer the question?
- Production, communication/information and transportation technologies are changing/advancing.
- Technology (industrial revolution) created non-farm employment which provides income for consumers
- Production technology allows fewer people to produce enough food for farmers and non-farmers.
- Processing, transportation and storage technologies allows food to be moved greater distance thus allowing it to be eaten by urban people, rather than by only rural people who are close to the source of food production.
- Information technology allows producers to learn more about production technology
- Information technology allows consumers and producers to learn more about market opportunities; consumers learn about products available in other locations, and producers learn about consumers in other locations.
- Transportation and storage technology makes its feasible for interested consumers and producers to buy and sell to persons in other locations.
Explanation of implications based on several theoretical concepts -- visit these two pages as "sidelights" and then return to this page to complete the discussion. What impact are these changing technologies having on competition? Why? Can you explain this using terms and concepts you learned in ECON 201 and 202?
Implications of the Trends in Agriculture
First level observations about implications
- Reduced number of farmers and increased farm size
- Increased consumer income; consumers only need so much food; as consumer income increases, they do not buy more food
- Reduced portion of consumer income spent on food -- they become more selective of which food they consume
- Altered consumer preferences due to increased income and reduced cost of food -- away from home, easy to prepare, safe, nutritious(?), minimum adverse environmental impact, etc
- Globalization -- consider impact of trade (see below)
- Impact of Trade
- Let's explore the impact of trade by considering a simple situation with two markets that each have producers and consumers. Producers in market A (producers A) supply products for consumers in market A (consumers A), and producers in market B (producers B) supply products for consumers in market B (consumers B). Whether or not the producers are providing the quantity or type of products their consumers want depends in part on what natural resources each market has, what the producers know about using those resources, what the consumers want to consume and what the producers know about the consumers' desires or preferences. But if there are not many alternatives about what products can be produced from the natural resources or the producers are unable or unwilling to produce alternative products, the consumers may be stuck living with what is available.
- As production technology becomes available, each set of producers can produce additional as well as alternative products.
- As communication technology becomes available, producers can learn about the demand by consumers in other markets and consider producing those products.
- As transportation technology becomes available, it becomes realistic for producers to produce alternative products for consumers in other market.
- If producers A decide to do this, consumers B enjoy the added supply and producers A enjoy the added demand.
- However, consumers A are disappointed to see less product available to them because it has been exported to another market and producers B are disappointed to see additional product available to their traditional customers (consumers B).
- Trade is welcomed by two of the four groups and may be opposed by the other two groups. But without technologies, trade would not even be an alternative.
- At a minimum, enhanced communication and transportation technology increases competition. Now consider what has happened to communication and transportation technologies in the past several decades? Is it easy to begin to understand this idea of globalization? Is it easy to understand that advancing technologies is THE MAJOR driving force?
.Restating the impact of technology on trade
- More is being produced (a result of production technology?); we (the world?) are aware of the additional production (a result of information technology?), and it can be moved to where consumers want to use it (a result of transportation technology?).
- Producers feel increased competition due to increased production (production technology) and competing products able to be moved into the producer's market (information and transportation technologies).
- Consumers feel increased competition because other consumers can enter their market (information and transportation technologies) to compete for the products available in the consumers market.
- Accordingly, some producers welcome increased number of consumers because it increases demand for the products they produce.
- Bottom line -- these technologies combine to increase production and availability of the products. The general result is an "increase in the standard of living".
- New technology appears to be a cost (research, development, adopt, etc), but the initial cost will hopefully be recovered over years of use. Uncertainty (risk?) is a major consideration in continuing to advance technology. Who takes this risk? Society through government research? Individual "inventors"? Private businesses with capacity (ability) and willingness to assume risk of developing new technology?
- How does the ownership of research results (new ideas) impact a risk-taker's willingness to assume the uncertainty associated with trying to create new ideas/technology?
- Biotechnology is not being accepted by some producers and consumers? Why? Again, can you explain this using terms and concepts you learned in ECON 201 and 202?
- See Productivity Growth in U.S. Agriculture. ERS, USDA, September 2007.
Consumers influence the food industry; USDA describes the agriculture industry as "consumer-driven." What does it mean that the industry is consumer-driven? Why is the industry consumer-driven (think in terms of both the U.S. domestic market and the global market)? What are the implications that the industry is consumer-driven?
- See A Revolution in Food Retailing Underway in the Asia-Pacific Region. Coyle, W. T., USDA ERS June 2006. -- required reading
Production agriculture relies on natural resources of soil, water and air; production agriculture also impacts these resources. Production agriculture prides itself on being a steward of natural resources; but society also is imposing environmental rules or limits on production agriculture. Can we diagram and explain the impact of an environmental regulation? Consider the economic concepts of marginal cost (MC), marginal revenue (MR), profit maximization, supply, demand, and then a shift in MC, supply, and increased cost to today's consumer. (Review these economic concepts within the context of diminishing marginal productivity.)
- What is the purpose of an environmental regulation and who benefits from such a regulation?
- Impact of an environmental regulation is between today's consumer and tomorrow's consumers but we will subsequently consider why this general statement maybe inaccurate.
Second level observations about implications
- Opportunity for niche markets
- What holds producers back from pursuing niche markets?
- Consider willingness and ability to assume risk
- To assume a risk, an individual needs both a willingness to assume risk and an ability to assume risk.
- Willingness to assume risk is generally an attitude
- Ability to assume risk is often based on economic resources (review what information is available on a balance sheet)
- It is often stated that younger persons are more willing to assume risk, but older people have more ability to assume risk (more equity?).
- As an individual ages (according to this description), their willingness to assume risk declines while their ability to assume risk generally rises.
- To assume a risk, an individual needs both a willingness to assume risk and an ability to assume risk.
- Strategy of vertical integration
- Introduce alternative strategy of supply chain management
Summary of Key Points
This section discussed changes occurring in the agriculture/food industry. The discussion also addressed how advancing technologies in the areas of production, communication and transportation are causing many of these changes. The impact of the industrial revolution and the urbanization of many people around the world also was considered.
- Advancing technologiesincrease competition by allowing producers to increase output, and allowing suppliers and consumers to identify and interact with a larger number of people and businesses.
- Recall that expanded trade impacts not only the new sellers and new buyers, but also impacts current buyers who now have to compete with new buyers and current sellers who now have to compete with new sellers.
- Who ultimately benefits from advancing technologies?
- Expanded number of non-farm careers has increased the number of consumers who purchase their food and has increased their income.
The discussion reviewed several economic concepts, including determinants of demand, determinants of supply, characteristics of perfect competition, and implications of perfect and imperfect competition. In addition, the discussion addressed the idea or strategy of "intentionally breaking out of perfect competition" and the business practice of supply chain management. Also introduced willingness and ability to assume risk.
- Increased consumer income has expanded and altered the consumers' demand for food.
- Changing consumer demand/expectations is reflected in the market as well as in government regulations.
- For example, an environmental regulation is a decision about consuming today versus consuming in the future, assuming all producers must comply with the same regulation.
- Changing consumer demand/expectations is reflected in the market as well as in government regulations.
- Advancing production technology has expanded global food production; advancing communication and transportation technologies have increased competition for suppliers and consumers of food.
- Firms facing perfect competition have minimal opportunity to earn an economic profit.
- Firms can pursue strategies that reduce competition, these strategies include controlling access to information about production technology and market opportunities.
- Firms can enter into business arrangements that include immediately sharing information to reduce cost, but these arrangements alter the business' risk exposure.