Industrialization of Agriculture

The development of producer-owned processing cooperatives occurring in the U.S. has partly been a response to the larger transformations occurring within agricultural production and marketing.  These transformations are often referred to as the industrialization of agriculture.  Although definitions vary as to what industrialization of agriculture actually represents, one description provided by the Council on Food, Agricultural and Resource Economics is as follows:
 

“Industrialization in agriculture refers to the increasing consolidation of farms and to vertical coordination (contracting and integration) among the stages of the food and fiber system.  The emerging system is expected to be highly competitive in global markets, more efficient, more responsive to consumer demands, less dependent on government assistance, and able to more rapidly adopt new technologies” (Council on Food, Agricultural and Resource Economics).

The Food and Agribusiness Sector
Adapted from S. Sonka, "Forces Driving Industrialization"

     This diagram indicates the traditional depiction of the agricultural production unit (represented by the barn) and its relationship to the other sectors of the food and fiber system.  The dark lines indicate that the production unit was traditionally seen as separate from other stages, including the input providers (depicted by the test tubes) and the processing sector (depicted by the factory and loaf of bread).  Industrialization of agriculture is effectively rubbing out the dark lines that separate the stages, so that production agriculture is now much more interrelated to the other stages of the system.

     Industrialization of agriculture is focused on the consumer.  It implies that changes in agriculture are occurring so that the industry can better meet the demands of consumers.  Today’s consumers have a diverse set of tastes and preferences in the foods they choose, and they have come to expect a level of variety and excellence in the foods being offered in the marketplace.  In order to meet consumer demands, the food supply chain is becoming more vertically integrated so that information about consumer preferences is driven back all the way to the initial producer.  The steps in the production and marketing process are becoming more tightly linked so that products can be tailored to consumer specifications right from the very beginning. 
 

     Advances in technology allow information to be shared more efficiently.  It also enables agricultural production to become more precise, so that products are can be fine-tuned to meet customer demands.  These two technological benefits - the sharing of information and precision in agricultural production - allow products to be designed from the farm to the dinner table so that customer preferences are met.  As a result, industrialization is helping to transform agriculture as a sector that was production-oriented to a system that is market-oriented.  In such a system, farmers no longer produce and then look for a market in which to sell.  Instead, those who control the supply chain ask, “what is it that the consumer wants” and then establish production systems or influence farmers accordingly.  As the arrows in the following diagram indicate, in a market-oriented system the decision regarding what to produce begins with the consumer.
 
 

     This transformation involves the realization that farmers are part of a larger food production system, and that the system produces according to the market demands of the consumer.  Essentially, the food chain starts with what the consumer decides to eat, not what the producer decides to produce.  A key question to be answered is: Are farmers simply a link in the chain that is largely managed by others, or can farmers play a broader role in supply chain management? 

The trend towards vertical coordination or integration has been occurring for some time; in 1996 the USDA reported that over the past 40 years farmers had become more dependent on production and marketing contracts and less dependent on spot pricing to market their goods.  The trend was particularly prominent in the broiler, turkey, egg, and specialty crop markets; by the 1990's, contracting or vertical integration had become the dominant methods of producing and marketing these products (Economic Research Service, 1996).

Hog farming has also been affected by the trend; a 1999 USDA report noted that approximately 40 percent of hog sales to packers were coordinated by contracts and integrated operations in 1998, compared to only 3 percent in 1980 (Martinez).  This trend accelerated in the 1990s with corporate concentration in all aspects of the pork chain becoming commonplace.  As an example, in 1999 the largest hog producer and pork processor in the United States, Smithfield Foods Inc., announced its proposed acquisition of Murphy Family Farms, the country's second largest hog producer.  With the completed acquisition, Smithfield would own about 12 percent of the hogs produced in the United States (Manitoba Co-operator, Western Producer).

Traditional versus Value-Added Agriculture

Some have suggested that industrialization has resulted in two types of agriculture: traditional and value-added.  Traditional agriculture refers to the production of bulk commodities, in which large quantities of undifferentiated, broadly graded products are sold in anonymous spot markets.  Price, quantity, and broad quality parameters are the key types of information needed.  In traditional agriculture, the different steps of the production system can operate relatively independently from one another.

     Value-added agriculture refers to the vertically coordinated production system that designs agricultural production to meet the needs of a specific customer market.  Specific product attributes is a key item of information.  The focus is always on the final food product rather than the initial bulk commodity. In such a system, the production steps are interdependent.  The shift towards value-added agricultural products is evident in the area of U.S. export growth.  As a percentage of total agricultural exports, U.S. exports of bulk commodities have declined from nearly 75 percent in the mid-1970s to roughly 40 percent in 1996.  Consumer foods, on the other hand, have risen from less than 5 percent of total exports to nearly 40 percent.  More importantly, value-added exports have been found to generate more income and employment than exports of raw commodities.  The Northern Great Plains region, however, is a major exporter of raw agricultural commodities (Northern Great Plains Rural Development Commission).

     One of the primary differences between the two types of agriculture is expected to be profit margins; traditional agriculture and the production of bulk commodities will be characterized by low margins.  Producing high volumes at the lowest possible cost is the key in such a market.  Value-added agriculture, on the other hand, is expected to provide higher profit margins because it adds more value to the agricultural product (Drabenstott).  A key question concerns who will control the vertically linked production system and benefit from these higher margins.

     In a report released in 1988, the USDA wrote that "In the future, most commercial farmers will be part of a system - either a corporate one controlled by investors or a cooperative one controlled by producers" (Vogelsang et al.).  In a sense, forming a cooperative is one way to help maintain producer independence; by agreeing to cooperate with each other and own their own business, producers can avoid becoming dependent on agribusinesses owned by investors who might have no personal involvement in the industry itself.  Randall Torgerson, the deputy administrator of the USDA’s Rural Business - Cooperative Service department, has described cooperative businesses as “one of the few alternatives for farmers to coalesce as a means for individual survival” (Mach).

     As well, by vertically integrating so that several steps of the system are controlled by the same group, producers can remove some of the conflicting interests or adversarial relationships that are typically found between producers and processors.  For instance, dairy producers want a good price for their cream when selling to manufacturers who will process the cream into butter, but the manufacturer wants to give the producers a low price in order to obtain a wider spread between input costs and the price for butter (Morrison).

 

 “Contract cooperatives...are a clear recognition that vertical integration is necessary but that it must be done from the bottom up or it will certainly be done from the top down.” - George Sinner, former North Dakota Governor

References

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