American Agricultural Industry
By looking at the historical highs and lows and the American agricultural sector, these constitute a success story.The early 1900’s saw the golden age of agriculture with many thriving farmlands across the United States.With many farms, competition heightened and together with other economic factors resulted to the decline in the agricultural sector in the late 1920s up to the early 1930s resulting to the bankruptcy of many small farms.
Abandoned lands became residential and commercial areas while the farms that remained became large farmlands that grew because of technological advancements.
This transformed the composition of the agricultural sector from many small to medium farmlands to niches of large farmlands driven by large capital investments and technological development. Government policies conducive to the growth of the agricultural sector also contributed to the further development of the agricultural sector. Although many small farms closed, the long-term impact of changes in the agricultural sector is the decline in farm poverty because of higher productivity and lower prices from the abatement of competition to a certain extent.
Although, contemporary agricultural sector has not regained the position it reached during its golden age, growth is sustainable. (Gardner 1-3) The present agricultural sector survived because of four factors. First is capital investments, in which the banking and financial sector played an important part. Second is sustained productivity due to the development of technological tools and processes. Third is government support for researches in the agricultural sector to support sound policymaking.
Fourth are the price-support programs of the government for stability that benefits farm owners by enabling them to gain sufficient profits to sustain continued production as well as consumers through lower prices so that food constitutes less than ten percent of the budget of consumption of American households. (Gardner 337) Methods of Production and Distribution Production and distribution in the American agricultural varies between the large and small farms.
In the case of the large farms, the method of production targets the mass market and takes advantage of economies of scale and the mode of distribution is through mass- marketing outlets such as large supermarkets and other retail venues widely accessible to consumers. There are large farms that have been able to produce more than one agricultural product and these distribute products within economies of scope by bundling complementary goods. Large farms achieve economies of scale by using high-technology tools and processes and taking advantage of the abundance of workers in the labor market.
Production in large farms use tractors to till land, small planes to spread pesticides over vast tracts of land, regulated water sprinklers, and other implements or even biotechnology by using pest or weather resistant varieties of seeds, vaccines for livestock, and weight control systems. Although these involve costs, it is only on a one-time basis with cost-savings accruing in the long-term, and technology supports mass production. Large farms also depend on contractual workers for the necessary manual work and the abundance of unskilled labor especially coming from Mexico has allowed farms to cut back on cost.
Due to cost-efficiency, large farms are able to cut-down on production costs and ensure high yields resulting to the ability to offer competitive market prices. As such, large farms are able to gain large supermarkets as distribution channels by offering a bigger mark-up price and gains for the retailers. (Paul and Nehring 526-528) In the case of the small, farms, production depends on its cost structure, revenue generation, and market so that methods of production implements basic technological tools and processes together with manual labor.
The low scale of production of small farms led to niche marketing targeting only a limited market to ensure sales. Distribution channels are through on-site retail outlets, groceries, and specialty stores. (Paul and Nehring 526-528) Market Structure and Concentration Market structure of the American agricultural industry experienced greater degrees of concentration. Technological developments have segmented the American agricultural industry into two groups.
One are the limited number of large farms that, in a way, can be considered as operating within an oligopoly or even nearing monopoly, except only for the government prerogatives to intervene to protect public policy. The other is small farms operating in an atomistic structure so that these do not have any significant effect on prices. There is a wide gap between the large and small farms in terms of productivity and market impact, with the large firms operating with large capital and employing high technology processes while households usually run small farms with limited workers using technological tools that fit their expenditure range.
This resulted to high barriers to entry and exit. Contrary to estimates, the number of farms in the American agriculture sector experienced little change in the number of players since there are around 2. 1 million farms remaining with an average of . 25 percent decline rate. This is because the large firms have remained stable with expansion through the mergers or the acquisition of small farms. Movement occurs in the case of small firms through the entry of small farms specializing on certain agricultural products for niche markets to succeed in becoming part of the agricultural market.
In addition, the difference in farmland also widened with the large farms producing on more than 1,000 acres of land while small farms only have less than 50 acres. (Ahearn, Yee, Korb 1182) Due to the segmentation of the American agricultural sector into a few large farms and many small farms, agricultural production is concentrated in the large firms contributing two-thirds to the primary agricultural production in the United States of grains, fruits and vegetables, and livestock. The remaining one-third comes from small farms. (Ahearn, Yee, Korb 1183)
Degree of Foreign Competition The degree of foreign competition in agricultural trade has grown because of the rise in the importation of agricultural products by the United States. This means that foreign competition has escalated due to the entry of agricultural imports, especially from developing countries.Projections show that in the next years the balance of trade would tip in favor of agricultural imports. During the 1980s up to the early 1990s, the United States is a string player in the export of agricultural products so that exports exceeded imports.
By the mid-1990s, the surplus in agriculture trade has declined from $27. 3 billion to $10. 5 billion so that even if agricultural exports continue to increase, the volume of imports is also doubling. This was due to the rise in agricultural export prices as the American economy experienced growth. Economic growth also fuelled agricultural imports since Americans had the income to purchase foreign products that flooded the market due to price differences. (Jerardo) Now, growth and patterns of consumption would further fuel the growth in the imports of agricultural products.
Rise in consumption together with the growing exposure of American consumers to international cuisine would continue to favor the importation of agricultural products. The consumption of foreign agricultural products should increase from 13 percent in the next years. (Jerardo) The major competitors of the United States in agricultural trade are China, India, Indonesia, Mexico and other agriculture-based economies in Latin America. These countries have large populations but these are also primarily agricultural economies owing to favorable climate conditions and low labor cost.
Raw agricultural products come from Mexico and the Latin American countries because of geographic proximity while processed foods, which comprise 62 percent of food consumption of Americans, come from China, India and Indonesia. (Jerardo) Industry Leaders The agricultural sector in the United States is a mix of sub-sectors such as livestock or fruits and vegetables, seeds or feeds, packing or processing, and research and development. The industry leaders have stakes in many or all of these sub-sectors to ensure their competitiveness, industry position, and market share.
Leaders in the agricultural sector comprise not really of the owners of farmlands but the firms controlling the agricultural sectors encompassing production, harvesting, processing, packaging, transport, and export of agricultural products. Large farms and agricultural firms have created clusters to gain access to these different sub-sectors. The clustering is dynamic depending on the shifts brought about by mergers and acquisitions. Currently, there are three clusters comprising the leading agricultural sector players. (Helper 1288) Cargill/Monsanto.
Cargill is a large firm engaged in the seed operations including research. It has a large capitalization and control over farmlands along the Ohio and Illinois River basin. Cargill purchased continental grain to gain access to corn, wheat and soybeans production along the Mississippi River for export. Monsanto is widely engaged in biotechnology and it has acquired patent over genetic products that ensure better yields through more resistant agricultural produce. Cargill entered into a joint venture with Monsanto in 1998 to gain access to the patented genetic products by offering its large capitalization as incentive.
Cargill/Monsanto focuses on the production, processing, packaging, marketing, and export of seeds as well as corn, wheat and soybean products. (Heffernan) ConAgra is engaged in various sub-sectors as a top-three flour miller, top-four corn miller, top-three live stock feed producer, top-two in cattle slaughtering, top-three pork processor, and top-five broiler producer and processor. United Agri Products, a subsidiary also engages in seeds, fertilizers, and other agricultural chemicals as well as biotechnology. It has its own packaging and processing plants as well as land and water transportation subsidiaries.
It collaborated with ADM for the operation of a grain export facility. ConAgra also has a stake in production, processing, distribution and export of grains and livestock. (Heffernan) Archer Daniels Midland Company (ADM) constitutes the largest processor of agricultural products such as corn, soybeans, wheat and cocoa. It collaborates with farm cooperatives to obtain raw agricultural products for processing or gained shares in firms engaged in agricultural production such as Growmark, Countrymark, United Grain, and Riceland.
It has expanded into the other sub-sectors through a join venture with Novartis to gain access to seeds, biotechnology, and agricultural chemicals. It has also engaged in the raising, slaughtering and processing of livestock through joint ventures with Consolidated Nutrition and AGP. ADM has also been able to participate in the major sub-sectors. (Heffernan) Thus, the agricultural sector in the United States operates through corporate farming. Scarcity of Land Scarcity of agricultural land the in the United States pertains to the land use conversion and degradation of agricultural lands due to the use of chemicals.
Land conversion decreases farm size while land degradation reduces productivity or causes shift in production from one agricultural product to another. This also pertains to the comparison of agricultural production with the consumption of agricultural products. In the United States, agricultural lands constitutes 46 percent of the land base, which remains a significant percentage share considering the massive industrialization of economic sectors. Of the 2. 3 billion acres of land comprising the United States, 442 million acres comprise croplands and more than 500 million acres of farmsteads, pastures and ranges.
Conversion of agricultural lands is not significant so that in the past thirty years, only six percent of agricultural lands have been converted for other purposes. In terms of land degradation, reports have not raised alarm on the rate of land degradation. In terms of food consumption, the increase in food imports is fuelled by change in consumption patterns and not the inability of agricultural lands to support the food needs of Americans. Moreover, the U. S. remains a major food exported. Land scarcity does not constitute a major problem in the American agricultural sector.
(Brady) Impact of Ethanol Production on Wheat Production and Cost to Consumers The government has implemented a fixed subsidy on ethanol at a floor rate of 40 cents for every gallon and a ceiling rate of 60 cents per gallon. The subsidy served as an incentive for production of ethanol as an alternative source of fuel in the United States. Relative to price of crude oil, ethanol is slightly cheaper depending on the volume of production. However, in the early 2000s, the price of crude oil skyrocketed to as much as $80 per barrel.
The huge difference in price opened opportunities for the expansion of ethanol production because of the fixed subsidy together with the room for price increase that would still be below crude oil prices but constituting significantly higher prices than its previous market offering. This means that some farmers have shifted to the sowing of raw materials of ethanol leading to a decrease in the number of farmers and farmlands producing agricultural products. This in turn led to the rise in the prices of agricultural products such as wheat and even soybeans.
In addition, other alternative sources of energy have gained momentum such as corn. Although corn receives lower subsidy compared to ethanol, the engagement of the agricultural sector in alternative sources of energy could significantly affect the volume of production of other agricultural products that would prove costly for consumers in the form of higher food prices. This effect has led to the emergence of the issue of food-fuel prioritization. (Tyner and Taheripour 1303) This is yet to be resolved and this would continue to become an issue in the agricultural sector until the next decade.
Conclusion Outlook for the American agricultural sector in the future points to a positive situation because the United States would continue to become a major player in agricultural exports while providing agricultural products to the domestic market. However, there are a number of policy issues that requires due consideration. First, forecasts of balance of trade shows a further decline in agricultural trade surplus with some even suggesting the probability of trade deficit.
This is because even if agricultural production experiences growth, the flood of imported food products could be greater, especially when these food products become cheaper as the price of domestically grown agricultural products increase. This will have a significant adverse impact on the American agricultural sector. Even if there is no food shortage, the flooding of cheaper agricultural products could contribute to the decline in the agricultural sector. The government needs to assess its import policies to balance consumer demand with the viability of the agricultural sector.
Second, land use and agricultural production needs assessment, since this falls within federal and state regulation, especially in the context of the food-fuel debate. The rising prices of agricultural products could be eased through the application of a flexible instead of a fixed subsidy rate together with the continued investment in research and development to justify the continuation of subsidies for ethanol and even the focus on fuel from corn. It has been thirty years since the government started implementing subsidies on ethanol but ethanol as an alterative fuel has yet to become a commercial source of energy as intended.
Thus, government policies on price support and agricultural research has played an important role in the growth of the American agricultural sector and this will not change in the future since the issues faced by the agricultural sector fall within the area of policymaking and subject to government regulation. Works Cited Ahearn, Mary Clare, Jet Yee, and Penni Korb. “Effects of Differing Farm Policies on Farm Structure and Dynamics. ” American Journal of Agricultural Economics 87. 5 (2007): 1182-1189. Brady, Michael. “Land Use, Value and Management. ” 18 October 2005.
USDA Economic Research Service. 26 April 2008 <http://www. ers. usda. gov/Briefing/landuse/> Gardner, Bruce. American Agriculture in the Twentieth Century: How it Flourished and What is Cost. Cambridge, MA: Harvard University Press, 2002. Heffernan, William. “Study on Concentration in U. S. Agriculture. ” 5 February 1999. Institute for Agriculture and Trade Policy. 26 April 2008 <http://www. greens. org/s-r/gga/heffernan. html> Helper, Susan. “Empirical Research in an Increasingly Concentrated Industrial Environment: Discussion. ” American Journal of Agricultural Economics 89. 5(2007): 1288–1289.
Jerardo, Alberto. “The U. S. Agricultural Trade Balance… More than Just a Number. ” 1 February 2004. USDA Economic Research Service. 26 April 2008 <http://www. ers. usda. gov/amberwaves/February04/Features/USTradeBalance. htm> Paul, Catherine, and Richard Nehring. “Product Diversification, Production Systems, and Economic Performance in U. S. Agricultural Production. ” Journal of Econometrics 126. 2(2005): 525-548. Tyner, Wallance, and Farzad Taheripour. “Renewable Energy Policy Alternatives for the Future. ” American Journal of Agricultural Economics 89. 5 (2007): 1303-1310.