Consolidation in the Food System: Consequences for Agricultural Sustainability

Ecological Agriculture Program

November 4, 2003

Chad Kruger

Consolidation: Definitions

• CR4 – concentration ratio of top 4 firms in a specific industry

• Food systems clusters – describes the structural nature of consolidated firms

• Seed to shelf – “life cycle” integration concept• Vertical integration – consolidation “up the food

chain”• Horizontal integration – consolidation across

food industries• Globalization – international consolidation

Consolidation in the Food System

Source for the following tables:

CONCENTRATION OF AGRICULTURAL MARKETS

February, 2002

Mary Hendrickson and William Heffernan

Department of Rural Sociology -- University of MissouriColumbia, MO 65211 (573)882-4563e-mail: HendricksonM@missouri.edu

email: HeffernanW@missouri.edu

Consolidation: So what does this mean?

• General comments:– Problems with the data???– This may be the most critical issue facing our food

and agricultural system – because this issue is what is dictating most of the other changes we see in agriculture.

– I urge caution in “passing judgment” against these companies . . . these firms are concerned with their own survival – and are not necessarily consolidating with malicious intent.

Consolidation: So what does this mean?

• Lost competition– If the CR4 controls at least 40% of the market in a

specific industry, than they effectively control the market without insider collaboration. They are able to watch each other’s movement and adapt as needed.

– We’ve already had several examples of failed consolidated agriculture and food systems in the Soviet and Chinese collectives – the type of command and control system that looks very similar to current consolidation trends in the US.

Consolidation: So what does this mean?

• Changes in Farm Structure:– What will the farm unit look like that can

service the high-volume, low-price, contracts required by a consolidated food system?

– What about changes in the “family” structure of agriculture -- and the consequences of that for our rural communities (consider the nature of broiler production)

– Do we even need farmers in the US?

Agriculture of the Middle

So now that we have looked at some of the data related to integration in the food system, and considered some of the

consequences consolidation might have on farm structure – let’s look at some of

the data on farm structure.

Agriculture of the MiddleSource for the following tables:

Why Worry About the Agriculture of the Middle?A White Paper for the Agriculture of the Middle Project

This white paper is a work in progress. It was begun largely by Fred Kirschenmann, Steve Stevenson, Fred Buttel, Tom Lyson and Mike Duffy.

But what they produced here is only a starting point and weinvite everyone involved in this process to offer additional information, propose

deletions or alternatives, or suggest rewrites.

Please send your suggestions to Steve Stevenson at<gstevenson@mhub.facstaff.wisc.edu> or Fred Kirschenmann at

<leopold1@iastate.edu>.

www.agofthemiddle.org

Ag of the Middle: Why Care?

• “If two or three farmers can produce all of the food and fiber we need, who cares? In fact, if robots can do it who cares?” – Official in the Office of Management and Budget

• We expect more from our farmers than the production of food and fiber – the multiple benefits of agriculture (soil and water protection, biodiversity, community stability, the landed democracy, etc.)

Ag of the Middle: Why Care?

“The central question still facing us is whether we can reasonably expect

farmers to provide these public services within the framework of the current

[consolidated] structure of the food and agriculture system we have developed.”

Kirschenmann, et.al.

Ag of the Middle: Key issues

• Scale–related market structure phenomenon – Mostly “mid-scale” farms that fall between the small, direct-market farms and the consolidated, contract farms.

• Over 80% of farmland is still managed by “mid-scale” family farms – whom generally consider more than profit margin in farm decision making.

Ag of the Middle: Key issues

• Loss of independent decision making. Family-unit farms tend to make decisions based at least in part on impact to neighbors, rural communities, and their children (the future farmers on the given land).

• Loss of potential diversity and risk - protection of many individual farms.

Ag of the Middle: What to do?• The “story of food” (Cluetrain). Market analysis has shown that many (25%) consumers are willing to pay a premium to purchase food in a “relationship” with the producer.

• We need to develop the supply chains that will make this “relationship-based” food system work.

•We need to support public research / education in production systems, market structures, and policies that support this new food system.

Ag of the Middle: Why Care?

“We have now reached a critical juncture. This is not just about farm numbers or ‘saving the family

farm’. The decline in farm populations. . .will dramatically change the very landscape of rural

America, jeopardize the future productive capacity of the land, and by extension, threaten

our food security and the health of urban communities.” Kirschenmann, et.al.

Globalization: Why Trade?

We’ve had a variety of issues presented in class in the last couple of weeks that beg the question of what the purpose of trade is in agriculture, (WTO presentation, Whidbey field trip, Kemmis book).

Since trade is so closely related to consolidation and globalization, this is a good opportunity to look at some of the basic definitions and arguments related to trade.

Globalization: Why Trade?

• World Context:– Balance of payments (related to debt) -- a summary

statement of a nation’s financial transactions with the outside world. Surpluses and deficits.

– Elasticities of Demand -Manufactured goods vs. commodities

– Macro-economic instability – inflation, etc. devalues currency – makes it worth less relative to other currencies.

– Foreign exchange - debt has to be serviced with foreign exchange that is more stable – US dollars, Euros

Globalization: Why Trade?

Comparative Advantage:

– A country has a comparative advantage over another if in producing a commodity it can do so at a relatively lower opportunity cost in terms of the forgone alternative commodities that could be produced.

Globalization: Why Trade?

Export promotion (trade agreements):

• Efficiency of production (based upon comparative advantage) provides goods for consumption at a lower relative cost than internal production.

• Trade agreements are designed to reduce barriers (usually tariffs and quotas) that enable goods produced with comparative advantage to be exchanged over a geo-political border.

• Why does the “South” tend to be an unequal partner in trade agreements? Manufactured goods vs. commodities – inelastic demand for commodities and synthetic substitutes (fiber optics [glass] for copper, etc.)

Globalization: Why Trade?

Import substitution:

• Substitution of an imported good for one produced internally – frequently protected by tariffs, quotas, etc. place on imports.

• Why is import substitution not a panacea for community development? Government intervention (in the form of protectionist strategies) tends to promote inefficient production, lack of capital for investing in infrastructure, many import substitution industries do not have comparative advantage – and require the continued [costly] protectionist investment of government or the industry is not able to compete with external goods.

Study Questions:

– On Friday, John Perkins presented the “Technology Treadmill” – and came to the conclusion that farmers who do not adopt tend to get squeezed out. Apparently, this is related to the historical trend that has led to the current consolidation trend and “disappearing middle” of farms. Are we kidding ourselves in attempting to recreate a mid-scale food system? Or, could this mid-scale food system philosophy be a successful way to organize a market-based agricultural system?

– Should all food production be local? Is there some justification for consolidation? What about local ecology as a justification for comparative advantage theory?

– Corn model if time permits