By Lamb, Russell L.
Regulation , Vol. 26, No. 4
THE U.S. FARM ECONOMY HAS UNDERGONE profound changes in market organization. A wave of consolidation has shifted a larger share of agricultural production to big, low-cost producers. Moreover, new forms of ownership and control that link the farm more closely to the family dinner table are replacing commodity markets as the dominant characteristics of the farm economy.
Unfortunately, U.S. farm policy has not kept pace with those changes. Crafted for the agriculture of the 1930s, farm policy now impedes market forces. The 2002 Farm Bill, rather than simplifying agricultural policy, has made it more confusing than ever and left Washington controlling more of the farm marketplace. The challenge for agricultural policy in the 21st century is to remove government from the farm marketplace.
WHAT IS THE NEW FARM ECONOMY?
The New Farm Economy is a fundamentally different system of producing and marketing agricultural products. It is the product of two forces: consolidation, which is creating larger farm producers that have lower production costs; and linkages between food processing companies and Farm producers through contract or vertical integration, which allows for closer coordination of production than through spot commodity markets.
Consolidation A wave of consolidation is creating larger farm producers. While there were almost three million farms in 1970, by 2002 the number had dropped by one-third to just over two million, according to the U.S. Department of Agriculture. In the hog industry, for example, the number of farms has declined by over 90 percent since 1970, a period in which pork production expanded dramatically, in the past two years, the number of hog farms has fallen 13 percent. In the beef industry, the share of the cattle inventory accounted for by small or medium-sized cattle producers has dropped substantially since 1988. Likewise, the share of production accounted for by smaller cattle feedlots (those with a capacity of less than 16,000 head) has dropped from roughly 57 percent to about 42 percent. Similar trends hold in the meatpacking industry, where the four largest packers account for roughly 80 percent of the total industry slaughter.
Consolidation has occurred because larger production units have lower per-unit production costs. For example, the lowest-cost hog producers have per-unit costs of production roughly one-half that of the higher-cost, smaller producers. In beef production, the largest herds (with more than 1,000 animals) have production costs that are 30 percent lower than the smallest.
Supply chains While efficient, low-cost producers are capturing a greater share of the market for farm production, the marketing of agricultural products is changing dramatically because of the emergence of supply chains. A supply chain arises when a producer, called the integrator, controls the production of each intermediate input to the final food product. Usually, but not always, the integrator is a food company (e.g., Tyson Foods or Smithfield Hams). The creation of supply chains may arise through vertical integration in which a single firm owns all of the links in the supply chain or through contracting in which a firm controls production processes through the use of supplier contracts.
Supply chains facilitate the production of consumer-oriented products while at the same time achieving cost reductions through more efficient production. One example of the dramatic impact of supply chains in the food industry is the transformation of poultry production. U.S. consumers favor chicken breast meat for its low fat content but dislike the relative dryness of the meat, so they like a seasoning that adds moisture and flavor. In response, integrated poultry firms have developed such products as pre-cut, pre-seasoned chicken strips and marinated chicken breasts pre-seasoned with Asian, Southwest, or other exotic spices. The integrator usually contracts broiler production to farmers, supplying both chicks and feed. …