Consolidation in U.S. Agriculture: The New Rural Landscape and Public

Policy

Emily Kearney

Outline

(Source: Drabenstott, Mark. Federal Reserve Bank of Kansas City Economic Review v84, n1 (1st Quarter 1999): 63-71.)

1. A New Wave of Consolidation Cost-savings consolidation Supply-chain consolidation

2. Implications of Consolidation for U.S. Agriculture

3. Public Policy Issues

Background

At the beginning of the 19th century 90 percent of U.S. population involved in agriculture; today just 3 percent.

Consolidation has been ongoing; what is new is the type and speed of consolidation

Two types:– Cost-savings– Supply-chain (vertical integration)

Questions Addressed

1. What does consolidation mean for U.S. agriculture and it participants?

2. What issues, if any does the wave of consolidation pose for public policy?

Cost-savings Consolidation

Low prices for agricultural commodities have spurred mergers to move down production costs (Cargill, Continental)

1998: more voluntary exits, farm auctions; profit margins are thin: “get big or get out”

Fewer, bigger farms can capture economies of scale– Capital and technology have boosted productivity

Supply-Chain Consolidation

All stages of production, processing and distribution are bound together (vertical integration)

Effect: a handful of chains dominate production

Changes to agriculture

Supply chains change…– How agriculture does business: contract production rather

than spot production– Where: concentrates production near processing facilities– Who: “concentrates production in the hands of savvy

producers who can manage tight production controls and negotiate sturdy long-term alliances”

Supply chains prefer coordinating fewer rather than many players to keep transaction costs low

II. Implications of Consolidation for U.S. Agriculture

Lower Costs– Economies of scale

Consumer and Competitive benefits– Lower food prices (but…monopoly power?)– More competitive in world markets

Implications of Consolidation for U.S. Agriculture

“New Business Challenges for Producers” Pushing costs down to survive in a market with thin

margins (technology= low costs, high productivity) Stay in the game while players getting bigger Local farmers left without competitive buyers

Dramatic Redrawing of Rural Landscape Diminishes what has traditionally been a strong link

between agriculture and local suppliers Profits drain out of local areas, don’t recirculate Fewer farm communities will be viable

III. Consolidation and Public Policy Issues

Slowing the Pace of Consolidation– If not, will put strains on farm families and

communities to even greater degree– Trend will continue as long as prices are low– Need to restore growth in world food demand and

boost U.S. exports stronger export growth will lift food prices and in turn will

mitigate (the pace of) rural impacts

III. Consolidation and Public Policy Issues

The Geography of Consolidation– Concentrating in new areas, shifting away from

traditional patterns– Need for national environmental standards for the

livestock industry Would provide a more level playing field, push location

decisions to the local level National threshold issues would also create a more

stable business climate and encourage investment in the US

III. Consolidation and Public Policy Issues

The Rural Impact– Many rural communities will be forced to find new

economic engines– Effects on communities will be even greater than

effects on farmers– “Put simply, many rural communities face a make

or break period in the years ahead– Ultimately responsibility for economic futures falls

to communities themselves. But…..

III. Consolidation and Public Policy Issues

Future is also shaped by Public Policies Financial markets- have less capital options, need

equity and other forms of capital Telecommunications- economic salvation? Infrastructure- highways, bridges, sewer systems Business Assistance- mostly techincal Research and Technology- need rural focus

Conclusion

As long as commodity prices stay low, consolidation is likely to accelerate

This means a painful transition for rural communities

However… “Consolidation is generally favorable for U.S. agriculture

and the U.S. economy. It will yield a lower cost structure, which in turn will lead to lower food prices and more competitive U.S. food and farm products in world markets.”