The U.S. Food and Fiber Industry Chapter 2. Discussion Topics Review of key measurement concepts...

The U.S. Food and FiberIndustry

Chapter 2

Discussion Topics

Review of key measurement concepts before we start

What is the food and fiber industry?Changing complexion of farmingOther sectors in the food and fiber

industry

Output and Price IndicesApple Production Price of apples

Year (million pounds) Output Index ($/pound) Price index

1985 4,222 0.76 $0.68 0.94

1990 5,515 1.00 0.72 1.00

1997 5,832 1.06 0.91 1.26

1990 is the base year

1990 is the base year

Page 18

Output and Price IndicesApple Production Price of apples

Year (million pounds) Output Index ($/pound) Price index

1985 4,222 0.76 $0.68 0.94

1990 5,515 1.00 0.72 1.00

1997 5,832 1.06 0.91 1.26

1990 is the base year

1990 is the base year

1.06 = 5,823÷5,515Output 6% higher in1997 than it was in1990….

1.06 = 5,823÷5,515Output 6% higher in1997 than it was in1990…. Page 18

Output and Price IndicesApple Production Price of apples

Year (million pounds) Output Index ($/pound) Price index

1985 4,222 0.76 $0.68 0.94

1990 5,515 1.00 0.72 1.00

1997 5,832 1.06 0.91 1.26

1990 is the base year

1990 is the base year

1.06 = 5,823÷5,515Output 6% higher in1997 than it was in1990….

1.06 = 5,823÷5,515Output 6% higher in1997 than it was in1990…. Page 18

1.26 = 0.91÷0.72 Price 26% higher in 1997 that it was in 1990….

1.26 = 0.91÷0.72 Price 26% higher in 1997 that it was in 1990….

Nominal and Real Expenditures

Nominal Expenditures CPI Real Expenditures

Year (million dollars) 1982-84=100 (Million dollars)

1980 120.3 0.868 138.6

1985 170.5 1.056 161.5

1990 252.7 1.324 190.8

1995 354.4 1.611 219.9

1982-84 average is the base year for the CPI

1982-84 average is the base year for the CPI

Page 19

Nominal and Real Expenditures

Nominal Expenditures CPI Real Expenditures

Year (million dollars) 1982-84=100 (Million dollars)

1980 120.3 0.868 138.6

1985 170.5 1.056 161.5

1990 252.7 1.324 190.8

1995 354.4 1.611 219.9

1982-84 average is the base year for the CPI

1982-84 average is the base year for the CPI

CPI was 61.1% higher in 1995 than it was in1982-84 period

CPI was 61.1% higher in 1995 than it was in1982-84 period Page 19

Nominal and Real Expenditures

Nominal Expenditures CPI Real Expenditures

Year (million dollars) 1982-84=100 (Million dollars)

1980 120.3 0.868 138.6

1985 170.5 1.056 161.5

1990 252.7 1.324 190.8

1995 354.4 1.611 219.9

1982-84 average is the base year for the CPI

1982-84 average is the base year for the CPI

CPI was 61.1% higher in 1995 than it was in1982-84 period

CPI was 61.1% higher in 1995 than it was in1982-84 period

219.9 = 354.4÷1.611 The increasing CPI eroded the purchasing power of the dollar….

219.9 = 354.4÷1.611 The increasing CPI eroded the purchasing power of the dollar….

Characteristics of the Food and Fiber System

The Nation’s food and fiber system consists of four sectors that providefood and fiber products to their ultimate consumer. Page 21

The Nation’s food and fiber system consists of four sectors that providefood and fiber products to their ultimate consumer. Page 21

The Nation’s food and fiber system consists of four sectors that providefood and fiber products to their ultimate consumer. Page 21

The Nation’s food and fiber system consists of four sectors that providefood and fiber products to their ultimate consumer. Page 21

The Nation’s food and fiber system consists of four sectors that providefood and fiber products to their ultimate consumer. Page 21

Changing Complexion of Farming

Physical structure• Fewer number of farms but larger-sized farms

• Increasing use of capital relative to labor

• Increasing productivity or output per unit of input

Financial structure and performance• Volatility of net farm income reduced by by subsidies

• Declining debt use strengthens equity position

• Recovering real estate values after sharp declines during the financial crises in the mid-1980s

Pages 22-32

Page 29

Year

Expansion of Agricultural ProductionExpansion of Agricultural ProductionO

utp

ut

Ind

ex 1

996=

1.0

Page 27

Ind

ex o

f In

pu

ts 1

996=

1.0

Declining Role of Hired Farm LaborDeclining Role of Hired Farm Labor

Farm Profitability Cash receipts from farm marketings

+ Government payments

+ Other income from farm sources

= Gross farm income

Page 29

Farm Profitability Cash receipts from farm marketings

+ Government payments

+ Other income from farm sources

= Gross farm income

– Production expenses

= Nominal net farm income

Page 29

Farm Profitability Cash receipts from farm marketings

+ Government payments

+ Other income from farm sources

= Gross farm income

– Production expenses

= Nominal net farm income

÷ Broadly-based price deflator

= Real net farm incomePage 29

Page 30

Nominal Net Farm Income

Instability of Net Farm IncomeInstability of Net Farm Income

Real net farm income in 1983 had the same purchasing power as 1933

Real net farm income in 1983 had the same purchasing power as 1933

Financial Structure Value of real estate assets

+ Value of nonreal estate assets

+ Value of financial assets

= Total assets

Page 31

Financial Structure Value of real estate assets

+ Value of nonreal estate assets

+ Value of financial assets

= Total assets

– Total liabilities or debt

= Equity or net worth

Page 31

Page 31

LiabilitiesOr debt

LiabilitiesOr debt

AssetsAssets

Equity or net worth

Equity or net worth

Start of FarmFinancial crisis

Start of FarmFinancial crisis

Page 31

LiabilitiesOr debt

LiabilitiesOr debt

AssetsAssets

Equity or net worth

Equity or net worth

Duration of FarmFinancial crisis

Duration of FarmFinancial crisis

Other Sectors

Farm input suppliers• Providers of variable production inputs

• Providers of fixed production inputs

Page 33

Relative Importance of Farm Input ExpendituresRelative Importance of Farm Input Expenditures

Page 33

Other Sectors

Farm input suppliers• Providers of variable production inputs• Providers of fixed production inputs

Food processors, wholesalers and retailers• Agent middlemen firms• Speculative middlemen firms• Processors and manufacturers• Facilitative organizations

Pages 33-34

The bulk of farm production flows through assemblers and brokersto food manufacturers and processors….

The bulk of farm production flows through assemblers and brokersto food manufacturers and processors….

Agriculture

Assemblers,Brokers, etc.

Food manufacturersAnd processors

Page 37

After value is added by food processors and manufacturers, the next stop is wholesalers, brokers and chain warehouses...

After value is added by food processors and manufacturers, the next stop is wholesalers, brokers and chain warehouses...

ImportsFood manufacturersand processors

Wholesalers, brokers,Chain warehouses

Page 37

Finally, the bulk of value added production flows through grocery stores to consumers…..

Finally, the bulk of value added production flows through grocery stores to consumers…..

Consumers

Institutionalmarket

Grocerystores

Specialtyfood

stores

Wholesalers, brokers,Chain warehouses

Page 37

Military

Page 39

Where a food dollar goesWhere a food dollar goes

Only 20 percent of each dollar spent on food products goesto farmers and ranchers…

Only 20 percent of each dollar spent on food products goesto farmers and ranchers…

Page 39

Where a food dollar goesWhere a food dollar goes

In SummaryIncreasing role of capitalProductivityWeak real profitabilityGovernment subsidiesInterrelationship 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….