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Agriculture and Selected Economic Concepts

North Dakota has one railroad lift bridge; it is described at the following web site: http://www.triptrivia.com/step4.php?Submit=Submit&State=35&StartCity=38255.  It is interesting that it was never used.  Why not?  How does that experience relate to agriculture and business management?  What might we learn from that experience?

The next several pages are an opportunity to consider 1) trends in agriculture, 2) causes of these trends in agriculture, 3) implications of these trends, and 4) opportunities arising from these trends.  Economic concepts that will be reviewed as part of this discussion includes 1) determinants of supply and demand, and the characteristics of perfect competition.  The impacts of trade also are briefly considered introduced, and the ideas of ability/capacity to assume risk and willingness to assume risk are mentioned.

The discussion begins with some general comments about agriculture.

Agriculture in the 21st Century

Our task is to think about decision making in agriculture in the 21st century, especially the first half of the 21st century when most of you as young adults will have your careers.  But to think about the future, it often is helpful to review the past looking for trends and then to envision the future assuming those trends continue, or at least they provide some insight. 

We could review the past 10,000 years of food production, but it might be adequate to begin our review 200 years ago in the early 19th century and then identify several major events or trends since the latter part of the 1800s.

Agriculture is more than farming and ranching.  The farms and ranches, vineyards, orchards, feedlots, and other locations are the production sector of agriculture; that is where the agricultural commodities are produced.  But agriculture also includes the businesses that "move" ag commodities to consumers, these include food processors that transforms ag commodities into food products, the transportation sector within agriculture, rural elevators, the retail sector that sells food to consumers for final preparation for consumption at home, as well as the food service sector that prepares food for consumption away from home. Agriculture also includes the businesses that provide inputs for ag producers, such as, equipment manufacturers, pesticide and fertilizer suppliers, seed companies, storage businesses, research firms, businesses that provide marketing information and financing -- and the list goes on.

A common phrase used to describe issues relating to food safety is "from farm to table," implying that steps need to be taken through the industry to assure a safe food supply.  But that interconnection may be an accurate descriptor for all issues relating to food, not just food safety issues. Some suggest that the phrase "from farm to table" should be altered to describe the critical role of natural resources and the impact the industry and consumers can have on our natural resources of water, soil and air.  Continuing this thought, it may be helpful to describe the process of feeding the world not as having a beginning and ending point, but as an ongoing circular process where each stage or step can impact the overall system.

In addition, agriculture in the 21st century is more than food; it is critical that we do not overlook the role of agriculture in the expanding renewable energy industry.  For example, see U.S. Ethanol Expansion Driving Changes Throughout the Agricultural Sector.

Also, what might be the role of agriculture in producing functional foods in the future?

• Functional foods are "... processed foods containing ingredients that aid specific bodily functions in addition to being nutritious ..."; they provide "... an additional physiological benefit beyond that of meeting basic nutritional needs."
• See "Functional Foods:  Their Role in Disease Prevention and Health Promotion"

Even though much of the focus will be on the production sector of agriculture, it is critical to remember that the agriculture industry is a complex system of inter-related, interacting businesses.

As agriculture expands its role into the energy industry and beyond, is it appropriate to think of agriculture as a biological way to capture sunlight to meet current food and energy needs, rather than relying extensively on past sunlight that is stored as fossil fuels?

Issues related to agriculture extend beyond food and energy. They also encompass the rural areas where much of production agriculture occurs. We revisit this topic in a subsequent section.

Agriculture is a Dynamic Industry

For persons familiar with production agriculture, an almost immediate comment, when asked "how is agriculture changing" is that farms are becoming larger and there are fewer farm businesses.  But this one descriptor, although important, does not fully explain what is happening.  Some history may be helpful.

For much of the world until the mid-1800s, most persons were involved in agriculture.  For example in the United States, 90% of the population were farmers in 1790.  Essentially, people produced the food they consumed.  See http://www.agclassroom.org/gan/timeline/farmers_land.htm.  A century later (1890), farmers were 43% of the labor force.  In another century (1990), farmers were 2.6% of the labor force.  The following table provides additional detail about changes in the production sector of the U.S. agriculture industry.

What caused this shift that allowed people to do something other than produce their own food?  Restated, an increasing number of people in the past 200 years (a relatively short time from a historical perspective) did not produce their food, but instead relied on being able to purchase food from someone else. What happened?

Before answering that question, let's change our focus for a moment and think about the consumption of food. Over time, the portion of income used for food has been declining for persons living in the United States (and other developed nations).  See food expenditures as a percent of income; at Economic Research Service. Food CPI and Expenditures: Table 7, USDA.  Also see Despite Higher Food Prices, Percent of U.S. Income Spent on Food Remains Constant.

Food expenditures by [U.S.] families and individuals as a share of disposable personal income
Year	Total	At home	Away from home
	Percent	Percent	Percent
1929	23.4	20.3	3.1
1939	21.3	18.1	3.2
1949	22.1	18.0	4.1
1959	17.8	14.3	3.5
1969	13.7	10.2	3.5
1979	13.4	9.1	4.3
1989	10.9	6.8	4.1
1999	10.2	6.1	4.1
2009	9.5	5.5	3.9

What is happening to allow this trend in food expenditures?  Does the cause of this trend in food expenditures bear any relationship to the cause of the trend of decreasing farm population?

Several Historical Points

The following excerpts from USDA publications may help us gain a sense of where we have been, where we are, and where we may be going.

• "The U.S. economy generally prospered during the first two decades of [the 20th] century. The agricultural sector was also generally prosperous, with the 1910-14 period often being regarded as the golden age of American agriculture (with the subsequent parity price formula being based on these years), which was then followed by a boom during World War I.

"Concerns about farmer bankruptcy were heightened from 1920 through the Great Depression of the 1930’s. Commodity prices collapsed after 1920. Sharply lower incomes left many farmers, who had borrowed to finance land acquisition and improvements before 1920, unable to repay their loans. Farm-sector problems continued or were intensified by the general economic collapse in 1929, leading to the Great Depression and widespread adverse weather problems affecting agriculture in the 1930’s. Nominal farmland prices fell from a post-World War I high of $69 per acre in 1920 to a Great Depression low of $30 per acre in 1933. Per acre farmland values then slowly increased in most subsequent years, but it was 1951 before the per acre value exceeded that of 1920." [excerpt from Are Farmer Bankruptcies A Good Indicator of Rural Financial Stress?]

• "In the early 20th Century we had a golden age for agriculture from 1910 through World War I until 1920. This came about at the time of the closing of the frontier, with immigrants flooding the cities and with industrialization employing growing urban populations and drawing rural folk from the land. This collapsed with world food surpluses in 1921. We tried to deal with the collapse with the Agricultural Adjustment Act, soil conservation programs, and other means, but it was World War II that provided the ultimate demand stimulus for improvement." [excerpt from Technology and Structural Changes in Agriculture Since 1900]

• "The relative decline in the farmers' position had begun in the summer of 1920 when the United States began the transition from a debtor to a creditor Nation after World War I, resulting in a continued loss in the volume and price of exports. Thus, for a decade farmers were caught in a serious squeeze between the prices they received and the prices they had to pay before the situation became critical and a major element of the Depression.

"Farm journals and farm organizations had, since the 1920s, been advising farmers to control production on a voluntary basis. Attempts were made in some areas to organize crop withholding movements on the theory that speculative manipulation caused price declines. When these attempts proved to be unsuccessful, farmers turned to the more formal organization of cooperative marketing for staple crops. After voluntary organizations of wheat and livestock producers collapsed, farmers began campaigns for Government assistance in solving the farm problem.

"A number of programs were proposed, but the one which gained widespread support became known as the McNary-Haugen Plan after it was introduced into Congress in 1924 by Senator Charles L. McNary of Oregon and Representative Gilbert N. Haugen of Iowa. The plan was first promoted by George N. Peek and Hugh S. Johnson, managers of the Moline Plow Company. Their company had failed because of the farm depression. As Peek said, "You can't sell a plow to a busted customer." Both Peek and Johnson had worked in the War Industries Board during World War I and, based on this experience, felt Government action could provide economic stability. At the convention of the American Farm Bureau Federation in late 1921, Peek and Johnson presented a plan for selling farm products for domestic consumption at a fair exchange value and surplus products abroad at a world price. With modifications, the McNary-Haugen bill was before Congress from 1924 until May 23, 1928, when it was vetoed for the second time by President Coolidge." [excerpt from History of Agricultural Price-Support and Adjustment Programs, 1933-84]

Thought Questions

• How could the years before World War I (1910-1914) be the "Golden Age of Agriculture"?  What was happening?  Why would not the years of World War I be the primary years of the "Golden Age"?  How could U.S. agriculture begin to lose some of its "shine" during World War I when we were feeding Europe as well as ourselves?
  • HINT -- when did the industrial revolution begin to often non-farm employment opportunities?  When were farmers able to widely adopt production technology?
  • HINT -- the industrial revolution often urban employment BEFORE ag production technology hit full stride? Consumer income is increasing faster than the supply of food; what happens to food prices and what happens to farm profitability?

• Why was there such excess production after World War I (1920s)?  Was it more than "the return of Europe to farming"?  How could Europe resume production so quickly?
  • HINT -- when did ag production technology become available and when did farmers have enough profit to invest in this technology?  What happens to the supply of food when new technology is being used to increase production?  What happens to the price of food and the profits of farmers if production technology is increasing the supply of food more quickly than consumers are increasing their demand for food?

• If U.S. agriculture was already financially stressed in the 1920s, why did it take until the 1930s for Congress to enact "ag" legislation?  How does the answer to that question relate to U.S. ag policy in the 21st century?

What thoughts can we glean from others?

The discussion has not yet answered the question of what is driving or causing these changes in production agriculture and consumers. 

See:  Food and Agricultural Policy -- Taking Stock for the New Century by USDA, September 2001.

• Executive Summary -- required reading (pages 7-20 of the pdf file)
  • Pay special attention to the following topics: consumer-driven agriculture, a global economy, technological innovation, agricultural diversity, implications of change, trade expansion, conservation and environment, rural communities.
• Full report -- suggested reading
• Major topics in this report are
  • The Evolving Food and Agriculture System
  • Trade Expansion Is Critical
  • Farm Sector Policy
  • Enhancing the Infrastructure
  • Conservation and the Environment
  • Rural Communities
  • Nutrition and Food Assistance

Also see:  The U.S. Food Marketing System, 2002 ERS Agricultural Economic Report No. AER811. August 2002

• Abstract -- This report focuses on recent trends in the food supply chain. Chapters on food manufacturing, wholesaling, grocery retailing, and food service provide a detailed overview of structure, performance, information systems, new technology, and foreign direct investments.  The report also contains a comprehensive set of appendix tables containing sales, concentration, trade, productivity, and other indicators. At the time of publication, most of the data sets used in this report included data through the year 2000.
• Introduction -- required reading
  • Selected excerpts: 
    • Efficiency gains in the food marketing system continue to result in abundant supplies of a variety of affordable food products.
    • [M]erger and acquisition activity continues to result in increased concentration.
    • Buyer-seller relationships are changing throughout the food supply chain as stages become increasingly interdependent.
    • The food marketing system continues to embrace new technology that improves the flow of information.
    • Competitive pressures are mounting for farmers to deliver the right types of products at the right time. Retailers are demanding a variety of high-quality products (for example, organic produce or exceptionally lean pork) delivered in a timely fashion. This increases the importance of agricultural product differentiation and precise information.
    • International trends in trade and foreign direct investment offer U.S. food marketers an alternative to the slowly growing domestic food market. It also leaves the U.S. food marketing system increasingly exposed to foreign economic developments, policies, and changing consumer preferences.
• Major topics in this report are
  • Food manufacturing
  • Food wholesaling
  • Food retailing
  • Food service
    • These topics do not encompass the farm input sectors

Consider:  Vertical Coordination by Food Firms Rising, Along with Contract Production USDA's Economic Research Service; AIB-720, June 1996, summary of report -- required reading

Visit: Microsoft's Customer Model. Read the first part of the Introduction; i.e., p. 4 to the top part of p. 5 of the pdf file.

"Now more than ever, competitive advantage comes from the ability to transform ideas into value -- through process innovation, strategic insights and customized services. We are evolving toward a diverse yet unified global market, with customers, partners and suppliers that work together across cultures and continents. Business is becoming more transparent, with a greater need to ensure accountability, security and privacy within and across organizations.

"All of these changes are giving people new and better ways to work, but they also bring a new set of challenges: a deluge of information, constant demands on their attention, new skills to master and pressure to be more productive.

"A recent study showed that 56 percent of workers are overwhelmed by multiple simultaneous projects and interrupted too often; one-third say that multi-tasking and distractions are keeping them from stepping back to process and reflect on the work they're doing. In the United Kingdom, it's estimated that stress accounts for nearly one-third of absenteeism and sick leave.

"Finding the information people need to do their jobs is to difficult. The software innovations of the 1980s and 1990s, which revolutionized how we create and manipulate information, have created a new set of challenges: finding information, visualizing and understanding it, and taking action. Industry analysts estimate that information workers spend up to 30 percent of their working day just looking for data they need. All the time people spend tracking down information, managing and organizing documents, and making sure their teams have the data they need, could be much better spent on analysis, collaboration, insight and other work that adds value."

These publications are now several years old. What is the impact of recent events, such as declining value of the dollar and expanded use of renewable energy based on agricultural commodities? What is the impact of increasing wealth for many people, such as in China? What is allowing these people to substantially increase their income at this time?

Now is a good time to review the text:   Farm Management in the Twenty-First Century; Kay, et al, Chapter 1

• As you read chapter 1, carefully consider the importance that a manager knows the "environment" in which the business operates. The manager needs to understand the internal operations of the business and the external forces that impact the business. Chapter 1 discusses several topics in both of these categories.

• The authors of the text draw our attention to:  New Technology, Information Age, Financial Management, Human Resources, Producing to Meet Consumer Demands, Collaboration, Environmental and Health Concerns, and Globalization
  • What do these topics have in common?
  • Why are these topics important today? Were they important in the past? If no, what has changed to cause the topics to be important today?
  • HINT -- Are agricultural producers and other agribusinesses becoming less "independent?"

How to think about the trends in Agriculture

• As we discuss trends in agriculture/food industry, it also is appropriate to think about the strategic planning process and decision making process discussed in other sections. Our vision for the future of the industry is input into developing a vision for our business.
• Likewise, it is appropriate to review relevant economic concepts, such as the determinants of demand and supply and the characteristics of perfect competition. This second topic (i.e., level of competition) also considers how technology impacts the level of competition, the implications of perfect and imperfect competition, and ideas on why and how business managers may want to intentionally break out of perfect competition.
• Where can managers find credible information about trends in agriculture, the food industry, consumers and food consumption, emerging technologies, and rural economies?

The next page focuses on the causes of these trends of the past 200 years.

Last Updated September 5, 2010

Email: David.Saxowsky@ndsu.edu

This material is intended for educational purposes only. It is not a substitute for competent professional advice. Seek appropriate advice for answers to your specific questions.

E-Mail:sswandal@ndsuext.nodak.edu
Published by Agricusiness and Applied Economics
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