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

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

• Emily Kearney

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Outline

• (Source Drabenstott, Mark. Federal Reserve Bank
  of Kansas City Economic Review v84, n1 (1st
  Quarter 1999) 63-71.)
• A New Wave of Consolidation
• Cost-savings consolidation
• Supply-chain consolidation
• Implications of Consolidation for U.S.
  Agriculture
• Public Policy Issues

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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)

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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?

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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

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Supply-Chain Consolidation

• All stages of production, processing and
  distribution are bound together (vertical
  integration)
• Effect a handful of chains dominate production

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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

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II. Implications of Consolidation for U.S.
Agriculture

• Lower Costs
• Economies of scale
• Consumer and Competitive benefits
• Lower food prices (butmonopoly power?)
• More competitive in world markets

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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, dont
  recirculate
• Fewer farm communities will be viable

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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

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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

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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..

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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

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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.