General Sessions
The New Food Economy: Consumers,
Farms, Pharms, and Science
Jean D. Kinsey
“Most of the change we think we see in life
is due to truths being in and out of favor.”
Robert Frost in The Black Cottage (1914)
The new food economy is bigger, broader,
faster, and more demanding. It is a kaleidoscope of foods, firms, consumers, countries, contracts, and agreements that provide
us with a dizzying vision of moving targets.
We have witnessed the food and agricultural
industry move from a set of independent producers and marketing firms to a set of integrated and highly managed supply chains. We
have witnessed the development of demand
chains as consumers and retailers demand
differentiated products, identity preservation
and special food attributes. And now, we are
watching linear demand and supply chains
morph into webs of activities and tasks that
are undertaken not by well-defined or selfcontained firms or households, but by multiple parties up and down the food chain.
At least half of the Presidents of this Association since 1990 spoke from this podium
about new, broader definitions of agriculture and about the creativity of (us) agricultural economists in finding new questions to
ask and economic agents to analyze (Johnston, Houck, Armbruster, Schmway, Antle).
Warren Johnston likened us to black-footed
ferrets who continually find new ecological niches within which to thrive (Johnston,
p. 1115). Our former presidents saw the new
Presidential Address.
Jean Kinsey is professor in the Applied Economics Department
and Co-Director of the The Food Industry Center, University of
Minnesota.
Presidential Address delivered at the AAEA annual meeting
(Chicago, IL, August 2001). Invited addresses are not subjected
to the Journal’s standard refereeing process. A note of appreciation to Vernon Eidman, Benjamin Senauer, Brian Dietz, Hamid
Mohtadi, and Frank Busta for their earlier comments and suggestions. They bear no responsibility for this final draft. To Brian
Dietz a special thank you for data searches and the econometric
analysis that make figure 2 possible.
food economy coming; we are mighty fortunate to have had leaders with such foresight.
My goal is to further expand our collective
appreciation and enthusiasm for new intellectual niches, for the scope of food and
agricultural industries and how they fit into
the overall economy. By expanding the size
of the envelope that contains “agriculture,”
and examining the speed and complexity of
its people, products, firms, distribution channels, consumers and social policies, we should
find vast reservoirs of research challenges
and educational opportunities, as well as new
partners with whom to work.
I will ask you to tilt your heads and peer
through some different lenses at the food
industry in all of its complexity and trends,
and to ponder the challenges it presents to
our ways of thinking and analysis. I will start
by defining the new food economy and suggest its state of development. Then I will
turn to the concept of “clockspeed” to see
what we can learn about the dynamics of the
food sector and the trajectory of some of its
components. Finally, I will unlock the supply/demand chain to expose a web of tasks
and actors that cut across the links as we
know them.
The New Food Economy
First, the “food economy” is defined as the
entire food chain from the laboratories that
slice, dice and splice genes in everything from
our crop seeds, pharmaceuticals, and animals, to the cream cheese we spread on our
bagels. It includes all the familiar agricultural
input industries and farm production enterprises that we have studied for decades. It
includes a large number of firms that develop
ingredients and flavors for the food manufacturers and the two main streams of activities in manufacturing plants, namely food
Amer. J. Agr. Econ. 83 (Number 5, 2001): 1113–1130
Copyright 2001 American Agricultural Economics Association
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Number 5, 2001
for retail stores and food for foodservice
establishments. It includes a complex transportation and distribution system that sits
between food manufacturers and retail outlets. Retail food stores and foodservice establishments are supplied by separate sets of
wholesalers and distributors. Consumers are
the end game of this supply chain. The narrower arrows in figure 1 indicate the traditional flow of product from farm to fork.
Consumers are the beginning of the demand
chain, which is depicted by the wider arrows.
These arrows indicate the flow of information
about food preferences back through retailers, manufacturers and others to farmers and
even scientific laboratories.
A food system operates within the culture of its community, the economy of its
nation, and a market that extends around
the world. It includes natural resource and
environmental issues, labor and marketing
practices, waste disposal and recycling practices, and public policies that are important to participating firms, consumers, citizens
and even tourists. It includes the industries
that service the food chain like the financial sector, labor unions, government agencies, and educational institutions. It is a vast
and complicated industry and one in which it
is not obvious who is leading and who is following on any given day.
The food and agricultural sector of our
economy, not counting its auxiliary services,
makes up more than 9% of gross domestic
product. The food, fiber, and agricultural sector employs almost 15% of all nonfarm private employees, down only a fraction of a
percent since 1980 (table 1). Almost 13% of
Amer. J. Agr. Econ.
Table 1. Percent of Private Nonfarm Employment in the Food, Fiber, and Agricultural Sector of the U.S. Economy
Years
2000
1990
1980
Nonfarm Sectors
Food, Fiber, Ag.: Total
149 156
Food, Fiber
136 146
Agriculture
11 10
154
144
10
Manufacturing % of all
Food, Fiber, Ag. % of all
F&A % Manuf.
Fiber % Manuf.
166 209
23 30
101 97
63 91
274
41
114
104
Wholesale % of all
Food & Ag. % of all
F&A % Wholesale
63 68
13 13
213 192
71
13
182
Retailing % of all
Food & Ag.a % of all
Food & Ag. % Retailinga
210 215
113 112
539 522
202
95
489
Add Farming Employment
Percent of Self-Employed
129 136
Percent of all employed
including self-employed
10 14
190
Food, Fiber, Ag. & Farming
Percent of all employed
147 156
19
157
a All
gains are in retailing and most of those gains are in eating and
drinking places with small gains in agricultural services.
self-employed people and one percent of all
employed people (including self-employed)
are in farming, down from 19% of selfemployed and 1.9% of all employed in 1980.
Employment in retailing, especially foodservice, has risen whereas employment in food
manufacturing and wholesaling has declined.
Almost 54% of all retail employees work in
Figure 1. Supply and demand chain for the food system in the United States
Kinsey
the food business. Almost one-fourth of all
dollars spent in retail establishments is for
food or beverage. This makes the food sector
the largest single retail sector in the economy
including automobiles. Food and agriculture
comprise about 5% of the value of U.S.
imports and 8% of exports (U.S. Department
of Commerce, 1999). We participate in one
of the most dynamic and critical industries in
the country and the world.
The New Economy
The food and agricultural sector operates in
the context of the so-called “new economy.”
In the last two years, well over 500 articles in academic and trade literature have
addressed the concept. A selective reading
of these articles revealed common themes
about what the new economy is and is not.
It is not about dot.com companies, the stock
market, the Internet per se, or the death of
business cycles. It is not some new virtual
economic sector in cyberspace. It is about
a fundamental change in the way business
is conducted, organizations are formed, and
assets are valued. “At its heart, it is a move
from an economy based on the production of
physical goods to an economy based on the
production and application of knowledge.”
(L.Summers: quoted in Rauch)
Thurow (1999, 2000) claims that the new
economy is a manifestation of the third
industrial revolution. In this revolution, the
assets of an enterprise are increasingly
knowledge-based and intangible. Companies
will still produce and make profits on the
same products they always have, such as oil,
automobiles, milk, and butter but they do
it more efficiently. Profits and competitiveness depend less on land, raw materials, and
cheap labor, and more on consumer demand,
employee knowledge-base, intangible assets,
and flexibility. Thurow is quoted as saying
that “this is about the first time in history that
you can get rich by controlling knowledge
as opposed to controlling natural resources”
(Thurow 1999).
Owning and controlling the precious asset
“knowledge” have been made possible, and
perhaps necessary, by the discovery and
application of two powerful new scientific and technological breakthroughs, namely
biotechnology with genetic engineering and
digital computing combined with the Internet. They are interdependent developments.
Digital capacity made genetic mapping faster
The New Food Economy
1115
and the adoption of genetically modified food
production encouraged further investment in
digital tracking technologies. Both are revolutionary in their impact on the organization,
productivity, and responsiveness of virtually
every industry one can name.
Driven by larger, more demanding, and
more savvy customers, industries in the new
economy have become “consumer centric”
(Hammer). Driven by the network effects of
information technologies and its impact on
economies of scale, industries have become
more concentrated. Driven by the need for
new technology experts and expensive and
expansive knowledge, companies are forced
to build partnerships with parties outside
their own walls. Armed with a synergistic set
of new technologies, each of which enhances
the productivity of the other, the acceleration
of almost everything is palpable. It is as if the
speed limit has been raised for product innovation, proliferation and demise, for organizational structures and partners, for supply
chain management, and for consumer decisions.
Recent studies disagree about whether the
adoption of communication and computer
(information) technologies in the early 1990s
are the main reasons for notable increases
in output and labor productivity in the late
1990s. One study finds that two-thirds of the
speed-up in actual labor productivity since
1995 was due to the adoption of information technology (Oliner and Sichel). Another
study finds that the long-term trend in
multifactor productivity growth was actually
negative outside of the production of computers themselves (Gordon). Robert Gordon,
the author of the trend study, also questions
whether computer/Internet technology will
change lives and improve human welfare sufficiently to qualify as the third industrial revolution. He points out that although surfing
the Internet may be fun and informational,
it basically replaces other forms of information and does not increase our standard of
living as much as did electric light bulbs or
gasoline engines. Others point out that if
the organizational complements to computer
technologies are considered, their contribution to economic growth is proportionately
high compared to their share of capital stock
or investment. Organizational complements
such as new business practices, new skills, and
new industrial structures are consistent with
the claim that the new economy brings about
fundamental changes in the way business is
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Number 5, 2001
conducted. It emphasizes the “growing roles
of new products, new services, quality, variety,
timeliness, and convenience” (Brynjolfsson
and Hitt).
In the new economy, the product cycle is
reversed (OECD, Rauch). In old industrial
and agrarian models, newly introduced products were expensive and rare and in due time,
with marketing and distribution efforts and
consumer acceptance, they became cheap
and common. Think of handheld calculators, microwave ovens, kiwi fruit. In the old
economy, the familiar cobweb model that
establishes an equilibrium price depends on
the constraints of supply and demand. In
the new economy, the process of distribution and communication tends to come first;
products come later. Additional capacity cascades inexpensively onto the market making supply constraints less relevant. Think
of the microchip, cell phones, e-mail, genetically modified seed. In effect, the clockspeed of firms, industries, and even national
economies has accelerated.
Lower Volatility of Growth
Although the speed of change appears to
have accelerated, the volatility of overall
economic activity in the United States has
leveled out. Two central bank economists,
McConnell and Perez-Quiros (2000), analyzed the actual change in gross domestic product (GDP) between 1953 and 1999
and found a turning point in GDP volatility in 1983. This turning point and the subsequent reduction of GDP volatility were found
to be due to a leveling-off of the volatility of durable goods orders and a liningup of inventory shipments with retail sales.
This is precisely the type of efficiency that
the employment of new information technology in retail supply chains is supposed to
achieve. It lends credence to the hypothesis that increased productivity and growth is
being facilitated by new information technologies.
McConnell and Perez-Quiros (2000) found
another turning point in GDP in 1990; it
was related to nondurable goods behavior.
This led to questions about whether the food
economy, with its traditionally high volatility, mimicked or lagged behind the changes
in the overall economy. Examining several
data series related to the food sector revealed
some evidence that the food economy did
indeed have a change in volatility between
Amer. J. Agr. Econ.
1967 and 2000 that roughly matches that
found by McConnell and Perez-Quiros (1999,
2000). First, using chain-weighted GDP data,
McConnell and Perez-Quiros’ results were
reproduced. Then the same analytic methods were used to test for structural changes
in the volatility of growth in the consumer
price index for food-at-home, and food-awayfrom-home, and the value of total inventories for food manufacturers. Volatility is
measured as the change in the standard
deviation of growth rates.1 Tests for structural change in volatility involve assuming
the same autoregressive relationship that was
used by McConnell and Perez-Quiros (2000).
Equation (1) was estimated for each data
series.
(1)
yt = + yt−1 + t where
Vart = 2 The residuals from this specification were
used to test the stability of the Mean
(), the slope (), and the variance ( 2 )
using CUSUM and CUSUM of squares tests
(Brown, Durbin, and Evans) and Nyblom’s
L test (Hansen). Results of the Nyblom
tests on the CPI for food-at-home, foodaway-from-home, and value of total inventories of food manufacturers show that there
was a significant change in the mean and
the variance over the period 1967–2000
(see tables 2–5). Volatility decreased in these
three food related data series that roughly
mimics what happened in the overall economy. Figures 2–5 illustrate the dampening
of volatility that appears to start in about
1984 for food manufacturers and after 1991
for food prices. This provides further evidence that something fundamentally new is
going on.
Leadership in the adoption of information
technologies has been uneven across food
firms and over time (Kinsey and Ashman,
Kinsey 2000, 2001). In 1972, the food industry led the development of standards for the
now ubiquitous bar codes. The first retail
1
Following McConnell, et al. (1999, p. 6), the volatility of
growth is measured as the standard deviation of quarterly growth
rates over a particular period of time. The standard deviation of
growth—which is measured in percentage points—is the square
root of the variance of growth. The variance of growth is the
average of the squared deviations of individual quarterly growth
rates from the average growth rate over the particular time
period.
Kinsey
The New Food Economy
Table 2. Nyblom’s L Test for the Stability
of Chained GDP Growth: 1967:2 to 2001:1
Specification: yt = + yt−1 + t
where
vart = 2
2
Joint LC
Estimate
LC
CV(5%)
229
034
1506
008
010
113
131
047
047
047
101
Note: Nyblom’s L test as described in Hansen (1992). yt is chained GDP
growth. LC is the test statistic for a break point in each of the coefficients
listed in the first column. CV (5%) is the 5% critical value for the null
hypothesis of no break.
scanner was introduced in a grocery store
in Troy, Ohio in 1976, but food stores did
not exploit the power of the data they were
collecting until very recently (Walsh). Clothing and general merchandise retailers began
to use scanner data for inventory control in
the 1980s. They even shared sales data with
their vendors developing a “quick response”
system of ordering and delivery. This type
of a just-in-time distribution system is only
now being fully explored by the largest supermarket chains using the Internet and new
business-to-business e-commerce networks.
New Economy Consequences
What are the economic and social consequences of these new economic realities? Can
we adjust? Do we want to? Are there dark sides
that are yet to be revealed? The most widely
applauded phenomena over the past decade is
the longest recorded economic expansion in
Table 3. Nyblom’s L Test for the Stability of the Value of Total Inventories in
the Food Manufacturing Sector: 1967:2 to
2001:1
Specification: yt = + yt−1 + t
where
vart = 2
2
Joint LC
Estimate
LC
CV(5%)
337
033
4926
071
019
128
175
047
047
047
101
Note: Nyblom’s L test as described in Hansen (1992). yt is the growth
of the value of total inventories in the food manufacturing sector. LC is
the test statistic for a break point in each of the coefficients listed in the
first column. CV (5%) is the 5% critical value for the null hypothesis of
no break.
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Table 4. Nyblom’s L Test for the Stability of the CPI for Food at Home: 1967:2 to
2001:1
Specification: yt = + yt−1 + t
where
vart = 2
2
Joint LC
Estimate
LC
CV(5%)
241
050
1848
066
029
118
144
047
047
047
101
Note: Nyblom’s L test as described in Hansen (1992). yt is the growth
of the price index for food purchased for at-home consumption. LC is
the test statistic for a break point in each of the coefficients listed in the
first column. CV (5%) is the 5% critical value for the null hypothesis of
no break.
United States history and increased productivity at the national level that allowed us
to sustain low unemployment without inflation. The average economic expansion is
50 months long; the current one has lasted
113 months and counting (NBER). Recessions last an average of 6–16 months (The
Economist). The most recent economic slowdown reminds us that business cycles are
alive and well.
A skewed distribution of the aggregate
benefits from the new economy concerns policy makers and scholars alike. Zappala argues
that there will evolve a new wage (digital)
divide with the rich, who are adept at using
information and new technologies on one
side, and the poor, who cannot or would
not use new technologies, on the other. The
rapid penetration of information technologies into homes, schools, offices, jobs, and
farms cushions this concern. In 2001, the
Internet had penetrated into 57% of U.S.
Table 5. Nyblom’s L Test for the Stability of the CPI for Food away from Home:
1967:2 to 2001:1
Specification: yt = + yt−1 + t
where
vart = 2
2
Joint LC
Estimate
LC
CV(5%)
079
084
276
062
007
143
238
047
047
047
101
Note: Nyblom’s L test as described in Hansen (1992). yt is the growth
of the price index for food purchased for away-from-home consumption.
LC is the test statistic for a break point in each of the coefficients listed in
the first column. CV (5%) is the 5% critical value for the null hypothesis
of no break.
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Number 5, 2001
Amer. J. Agr. Econ.
Figure 2. Growth of chained GDP—1967:2 to 2001:1
households with computers found in 63% of
U.S. households (Angwin). Computer equipment and use in most elementary schools, and
the skills it is building virtually assure that
tomorrow’s adults will expect and demand
computers as part of their lives.
Many Americans are falling behind compared to the upper twenty percent of earners relative to their own income status in
the 1980s (Goozner). In 1998, the top 20%
of households earned 49.2% of the national
income compared to 46.6% in 1990 and
43.7% in 1980 (U.S. Census Bureau). In similar fashion, the wealth of the top 20% of
households stood at 83.4% in 1998, compared to 81.3% in 1983. Wealth in every
group in the bottom 80% of households fell
since 1983 largely because of rising household
debt. Unequal income distribution will likely
persist, but it will probably not be a function
of access to electronic technology.
Figure 3. Growth of prices of food eaten at home—1967:2 to 2001:1
Kinsey
The New Food Economy
1119
Figure 4. Growth of prices of food eaten away from home—1967:2 to 2001
Although the average person between ages
18 and 34 holds 9.2 jobs in the U.S. (BLSa),
the new economy has not decreased job
tenure. The median tenure for workers age
25 and older was 4.7 years in 1998, about the
same as in 1983 (Deavers). There has been
some trend towards shorter tenure for men
and longer tenure for women but more working men (34%) than women (30%) who are
over the age of 25 had been with their current
employer ten years or more in February 2000
(BLSb). Although there is little evidence
of faster turnover in employment markets,
the heartache and financial distress to those
required to leave a job and retrain in midlife
is real. The heartache of those who lose their
main street businesses or family farms to bigger, faster, and more efficient firms is real.
The adjustments in rural communities can
be profound. Some disappear, some become
bedroom communities for commuters, and
Figure 5. Growth in the value of total inventories in the food manufacturing sector—1967:2
to 2001:1
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some have to change the whole nature of
their commerce and culture.
The fundamental dynamics of connecting
communities to commerce and commerce to
consumers has repeated a familiar refrain
throughout the twentieth century. Early on,
the development of department stores killed
off many main street businesses; in the 1970s,
department stores had to fight to survive
against shopping malls and deep discounters; in the 1980s and 1990s, shopping malls
and discounters were threatened by category
killers and big-box superstores. In this millennium, all of these store formats are threatened by Internet selling. At each juncture,
the ability to move goods more efficiently,
be it by railroad, truck, car, or air, served to
lower the cost of goods, increase inventory
turns, increase economies of scale, and lower
consumer prices (Jennings and Haughton).
At each juncture, retail products and selling
formats that better served consumers’ needs
and saved them time came to dominate the
landscape.
Economic theory provides us with some
powerful, fundamental principles of market
behavior and entrepreneurship, but it fails
to predict or explain some common trends
in consumer and firm behavior, in the speed
of change in the relationships between firms,
and the apparent reversal of product cycles.
New and useful research about the dynamics
of change needs to focus on the transactions
between firms, on the boundaries between
tasks within a firm, and the interaction with
tasks being out-sourced to other firms or to
customers. As Michael Boehlje pointed out
in the Waugh Lecture in 1999, “We cannot
be confined by our traditional disciplinary
frameworks and empirical tools” (Boehlje, p.
1040).
In this spirit, let us explore the activities and ramifications of the new food economy with a concept called “clockspeed.”
It refers to how fast an industry or set
of economic agents changes their products,
processes, and/or their organization. Rapid
increases or turnover in products, processes
or organization increase the clockspeed of a
firm or industry segment. The concept is presented in detail by Charles Fine of MIT in a
1998 book entitled Clockspeed. Fine was on
a seven-year project to study the impact of
supply chain strategy on competitive advantage in the automotive industry. He wanted
to learn how choices at every stage in the
Amer. J. Agr. Econ.
supply chain affected firms and industry performance. However, documenting change in
that industry was, in his words, like “watching glaciers advance” (Fine, p. 5). So he
adopted a methodology used by biological
scientists, namely studying the behavior of
the Drosophila (fruit fly), whose clockspeed
is fast and easy to replicate. In the industrial world in the 1990s, the fruit flies were
computer manufacturers and the suppliers
of semiconductors. By documenting changes
in the products, processes, and organizations
of several industries with fast clockspeeds
Fine was able to identify strategic evolutionary patterns in industrial organization, in
response time to consumers/customers, and
in the processes of forming supply chain partnerships.
For us, the questions are: What are the
clockspeeds of products, processes and organizations in the food and agricultural supply
chain? How fast are they changing? Are the
clockspeeds of the various links in the chain
about the same? Can we discover the clockspeeds? How does the concept relate to economic theories we understand? To explore
these questions, changes in products, processes and organization will be examined at
selected links in the food chain. There is
not enough time and space to cover all the
possibilities here, but some of the obvious
and well-known developments will illustrate
the point and open up further questions for
others to explore with their own intellectual
tools.
Clockspeed of Consumers
One of the lessons from Fine’s observations
is that the consumers/customers are likely to
have faster clockspeeds than the producers.
So we will start by looking at changes in consumer preferences, lifestyles, and demands.
It is well known that consumers are more
informed and demand more differentiated
food products than ever. The preparation and
cooking of food has been pushed farther back
into the food chain with many Americans
unwilling or unable to cook even the simplest of recipes. John Antle, in his presidential address two years ago, attributed most of
this to the expected result of rising household income and greater income elasticities
for higher quality and safer foods (Antle).
Household economic theory also tells us that
consumers will demand more leisure and will
Kinsey
purchase more of their personal and household goods ready-to-use, or in the case of
food, ready-to-eat. Ironically, in the pursuit
of freedom from cooking and washing dishes
and in the pursuit of leisure time consumers
have accepted many tasks formerly delegated
to paid labor. For example, many of us now
scan and bag our own groceries. We fill our
own plates in buffet lines, pump our own
gasoline, print documents on our own printers, make our own airline reservations, and
arrive at airports an hour ahead of flight time,
to say nothing of typing our own manuscripts
and correspondence, in real time. One has to
question whether consumers are really saving time and gaining leisure or simply trading tasks with the commercial world. This
could simply be an illustration of the principle of comparative advantage. By performing
more tasks for themselves, consumers avoid
the disutility of waiting time. They perform
these new tasks because, with new technology, skill, and knowledge their marginal productivity is greater than the value of their
time and greater than the cost of purchasing
someone else’s labor. If it is relatively more
efficient for consumers to do these tasks, then
society realizes greater total output. In addition, consumers gain control and speed in the
performance of selected tasks. Their quest to
stay connected and informed, and the electronic gadgets that accommodate that quest,
have all increased the clockspeed of individuals. This might help explain why The Harried
Leisure Class (Linder) of the 1970s became
the Type A, multitasking, nonleisure class of
the 1990s and beyond (Gleick).
In the clockspeed framework, this swapping of tasks between firms and consumers
amounts to a change in the process by
which products and experiences are produced. There is also a significant change in
households’ organization over the past two
decades. Average household size continues
to decrease, with almost 60% of households
now having two or fewer persons and more
than one quarter containing only one person. The percent of households made up of
married couples declined to just over 51%
between 1990 and 2000. Nonfamily households increased 23% whereas family households increased only 11%. The proportion of
whites in the population dropped five percentage points from 80% to 75% in the
last ten years. In 1999, 63% of households
with earners, had two or more earners (U.S.
Census Bureau). In households, where both
The New Food Economy
1121
husband and wife were in the labor force,
25% of the wives earned more per year
than their husbands (Winkler). These organizational changes in the household change
the products they produce and the process
by which they conduct business. In general,
households are becoming less vertically integrated, more horizontal and more modular.
Clockspeed of Firms
The clockspeed of a firm in an industry
depends on how production tasks are performed and who controls the quality of the
inputs. If products are produced in a modular fashion, they can be assembled from many
pieces that can be made elsewhere, like a
computer, an automobile or a potluck dinner.
If products are constructed from whole cloth
by a single firm, then they are called integral products. Every input and step is controlled, monitored, and tracked to ensure the
integrity of the final output. For example, the
writing of a Ph.D. dissertation produces a
highly integral product. There is little opportunity to outsource pieces of the work, at
least not in a credible fashion. The knowledge and the capacity to produce a dissertation are endemic in the student with
important, but modest, input from professors, computer support personnel and print
shops. Similarly, the production of branded
products like Wheaties at General Mills Co.
or french fries at McDonalds requires control of all the processes and inputs. The
producer of an integral and proprietary product identifies the right genetic structure of
the raw material, and specifies the growing
time, soil conditions and pesticides. The delivery dates, price, and quantities are negotiated between the food manufacturer and the
supplier of raw products well in advance.
The entire food production process from laboratory to consumer is set in place before
any product is produced. Integrated products tend to be produced by organizations
that are vertically controlled whether through
ownership, contracts, or alliances. They tend
to produce branded, consistent, and reliable
products. However, this type of organization is vulnerable to competition from niche
players, complex management, and organizational rigidities (Fine). When these rigidities
inhibit progress or get in the way of competitive advantage, vertical integration starts
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to dissolve and firms begin to operate with a
more horizontal structure.
Horizontal structures are more flexible,
tend to have faster clockspeeds, with less control over the final quality of the consumer
product or experience. They are, however
vulnerable to technical progress in that they
often do not have internal expertise to recognize or adopt leading-edge technologies.
They are vulnerable to the market power of
their suppliers who may take over the identity of the product for which they are supplying parts. This destroys the unique asset value
of the original product’s brand. Examples are
Intel inside every computer, Coca Cola at
every retail store, or Pioneer on every farm.
The computer assembler, the retail store, or
the farmer can hardly avoid using or selling
these well-known supplier’s brands, but they
can hardly claim the branded components
give them a unique market advantage. Fine
cautions firms to beware of the “Intel inside.”
The lesson is from IBM who, when faced
with competition from Apple Computer in
the 1970s, chose a modular product architecture and outsourced the microprocessor to
Intel and the operating system of their computers to Microsoft. “The dominant product
was no longer an IBM computer, but the
IBM-compatible computer” (Fine, p. 45) It
destroyed the unique integrity of an IBM
computer and changed the industry from one
that was vertically organized into one that
was horizontally organized. Horizontal industries are also likely to have lower profit margins than those with proprietary knowledge
or asset specificity. Any one or all three of
these vulnerabilities may drive a horizontally
organized firm towards more vertical integration (Fine).
The transition from a horizontal organization with modular products and processes to
a vertical organization with relatively integral products and processes and back again,
is dynamic and predictable behavior. Borrowing further from the biological sciences, Fine
pictures this idea as a double helix around
which industries, or firms within industries,
are constantly moving as the nature of
their products, competition, and opportunities change. Thus, the locus of control in the
supply chain can shift in unpredictable ways
that will determine the fate of companies and
profits.
Amer. J. Agr. Econ.
The Modular Retail Food Store
The consolidation of retail food companies
over the past four years provides a good
example of firms moving from horizontal and
modular organizations to vertical and integrated organization. There is hardly a more
modular business than a retail food store.
It is a large building with shelves, refrigerators and freezers, filled with products manufactured by someone else. In some cases,
the owners of the branded products come in
and organize their products directly on the
retailer’s shelves. In some cases, the branded
products are owned by the manufacturer
until they are scanned at the point-of-sale to
the final consumer. Food manufacturers track
the sales of their products in great detail with
the help of data aggregators like Information Resources, Inc. (IRI) and A.C. Nielsen.
This knowledge gives them an advantage
when negotiating with retailers. Moving to a
more vertically organized and consolidated
retail structure helps to balance the negotiating power and leads to further retail
consolidation. The advent of new information technologies that allow for retail chains
to control the knowledge about what sells,
when, and to whom increases their advantage
in the asymmetric information game. However, new business-to-business e-commerce
models that advocate cooperative forecasting and sharing of data between retailers
and manufacturers presents both opportunities and threats in the ongoing power struggle
in the food system. The observed profitability of large concentrated chains with proprietary management information systems such
as Wal-Mart, led many supermarket chains to
move from a horizontal to a vertical structure
in the 1990s. Concentration ratios of the top
four retail food chains stand at 37% and have
grown at 15% per year since 1995. This rapid
change in the organization of the retail food
industry is a major public policy concern and
the subject of great debate about the impact
on consumers’ well being. So far, the cost savings realized by more efficient supply chain
management seem not to have raised food
prices and have arguably brought a larger
variety of products to many smaller communities. The long-run impact of this trend is
wide open for analysis.
As of yet, the integrated structure of
Wal-Mart has not been threatened into a
more modular operation by niche players or
organizational rigidities. They apparently can
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handle the complexities of all dimensions of
their business. They more than balance the
negotiating strength of their suppliers. They
are even integrating the analysis of sales data
and not sharing it with outside data aggregators. Their annual rate of growth between
1990 and 1999 was 21% in store units and
17% in sales (Foley; IGD). During the last
five years of this growth period, the total
number of supercenters (stores with at least
180,000 square feet) also grew 20% per year,
considerably faster than the total number of
store units across the top four retail food
chains (11.8%) (IGD).
Another way in which food retailers have
diminished the power of their suppliers is
to produce and sell products under their
own brand name. These products are positioned as better values, superior in quality
to national brands, and unique to a particular store. It is a way to build customer
loyalty and combat the dangers of the modular model, where they look just like every
other store. In the vertical retail chain, the
store’s identity becomes the brand name. In
the U.K., about 46% of food products in the
large chains are “private labels” (IGD). In
the U.S., private labels have been growing at
about 1.5% per year, standing at about 16%
of sales and 20% of products in 1998 (PLMA;
Food Industry Review, p. 153).
Horizontal to Vertical in Meats
Closer to the beginning of the food chain,
we have seen the poultry and hog industries move from modular and horizontal to
integral and vertical. Here, some of the
forces causing this evolution include technical
advances in breeding, feeding, and processing. Science played a major role in developing the genetics for leaner and healthier
animals. Science and engineering developed
machinery, buildings, and computer systems
to enable continuous growing conditions. Science also played a major role in developing
methods to deal with waste that threatens
to pollute water supplies or foul the air in
nearby communities. These agricultural sectors, like many to follow, discovered that
adding value to raw commodities increased
both sales and profits. They were responding to a demand pull. By 1987, more than
half the chickens sold were deboned and
cut up; by now almost 90% are sold in
this form to meet the demands for convenience by consumers and foodservice establishments (Ollinger). Being in a position to
The New Food Economy
1123
realize profits from owning proprietary information and technologies, and from using
standardized, bar-coded packages pushed this
industry into becoming more vertically integrated. The concentration ratio of the top
four (CR4) slaughtering companies for chickens rose from 14% in 1963 to 41% in 1992,
but the concentration ratio for poultry processing firms showed no trend, ranging from
52 in 1963 to 46 in 1992 (McDonald et al).
The CR4 for slaughter firms was actually
greater in the cattle industry (71 in 1992)
but their rate of consolidation (clockspeed)
between 1972 and 1992 (9% per year) closely
matched that of the chicken industry (8.58%
per year). According to Rogers, the CR4
ratio for all food and tobacco processing
industries increased from 51% in 1967 to
69% in 1992 with an average rate of growth
of 1.3% per year.
Industrial Organic Food
Observing food firms moving around the
double helix of organizational structure
brings to mind the organic foods niche.
Two decades ago, producers of organic foods
were small, passionate, and loosely organized. Most of their products were sold in
retail food cooperatives or farmers markets.
They were poised to be profitable because
there was a demand for their product and
they had a proprietary system that was not
readily duplicated. Demand for consistent,
high quality products from private retail companies like Whole Foods and manufacturers like General Mills pressured the niche
producers of organic food to become larger
and more integrated. Meanwhile, profitability drew in more and larger producers who
contracted with buyers or added value to raw
products, thereby integrating manufacturing
and marketing into their farming enterprise.
They made cereals, breads and pasta and
corn chips. At all levels of the food chain
those who produced and sold organic food
were perceived as a strong niche which competed successfully with mainline food companies. The reaction from larger integrated
companies was not to fight them but to
join them. Major manufacturers like General Mills wanted part of this supply chain
and, in 1999, they purchased Small Planet
Foods already a miniconglomerate of Canadian and California organic food companies (Pollan 2001b). Wholesalers sprung up
to handle organic foods and retailers everywhere began to carry lines of food designated
1124
Number 5, 2001
Amer. J. Agr. Econ.
“organic.” Producing and selling organic food
is no longer a unique competitive advantage.
In a consumer shopping survey by the
Food Marketing Institute (2001) 69% of
shoppers reported having access to organic
or natural foods in their primary retail food
store. In a consumer shopping survey conducted by The Food Industry Center at
the University of Minnesota2 , 20% of shoppers expressed a particularly strong preference for organic or natural foods (Katsaras, et al.). In the Supermarket Panel conducted by The Food Industry Center in 2000,
35% of stores in a nationwide representative sample reported selling organic food;
8% considered it a key competitive advantage (King). In the 2001 Supermarket Panel,
51% of retail food stores reported selling
organic foods, a 20% increase in one year.
Not surprisingly, with this type of market
growth, large farm producers have adopted
organic methods and integrated their operations into a secure buying chain. By now, five
farms control half of the organic fruits and
vegetables sold in California. This industry’s
sales have grown at an annual rate of 20%
since 1990 (Pollan, 2001a,b). This clockspeed
was achieved through new products and new
organizational arrangements.
to resist pests and soybeans to resist herbicides to cut production costs and/or increases
yields. The rate of increase in global acres
planted in bioengineered seeds since 1996 has
been 119.6% per year. The rate of growth
in sales of transgenic crops over that time
has been 89% per year (Clive). Contrasting the adoption rates in the U.S. of doublecross hybrid seed corn introduced in the early
1930s and transgenic corn introduced in 1996
shows that in the areas for which it was
tailored to grow, hybrid corn may actually
have been adopted faster. By 1940 (about
eight years after introduction) 90% of Iowa
corn land was planted in hybrid corn whereas
four years after the introduction of transgenic
corn, 25% of U.S. corn crop is from transgenic seeds (USDA-NASS). The clockspeed
for the agricultural sector of this industry
has been surprisingly fast and has produced
a ripple effect that is amplified as it moves
down the supply chain toward the consumer.
By now, 103.4 million acres or one-third of
the world’s crop land (69% of it in the U.S.)
are used to grow genetically modified seed
(Pardey) and about 70% of the foods on the
retail food store shelves are said to contain
some form of GMO ingredient. As Neil Harl
is quoted as saying, “The genie is already out
of the bottle” (Barboza).
Science and the Food Industry
Food and Pharms
Science has contributed mightily to the historic and current development of the food
and agricultural economy. A meta-analysis
of rates of return to investment in agricultural research estimated average returns of
81% and median returns of 44.3% over the
past five decades. The rate of growth in
public research expenditures for agricultural
research was 3.6% between 1971 and 1991.
Although there is a large variation in these
estimates, there is no evidence to support
the idea that returns have declined over time
(Alston et al.). What has changed is the variety of crops and crop characteristics that are
being discovered. As a result, we are in a
whole new era of scientific discovery with
genomics and biotechnology. A well-known
application is the genetic modification of corn
The clockspeed of truly new food products
resulting from genetic science is still rather
slow. It involves the merging of food and
medicine to provide opportunities for better
health, for greater strength and vigor, and
human resistance to disease. Pharms refers to
both the production of pharmaceuticals for
use in and with food and the use of agriculture to produce substances that can be used
as medicine. Most of the new food products
that promise extreme health on the market
today are not the result of genetic engineering, but the discovery of herbal medicines
and substances to treat chronic health conditions such as high cholesterol. In 1995, we
had not yet heard about functional foods or
nutraceuticals. Now, expenditures on functional foods in the U.S. are over $16 billion
a year or about 3.7% of total annual expenditures on food eaten at home (GAO). This
is only slightly more than expenditures on
dietary supplements ($14.7 billion) and over
twice as much as expenditures on organic
foods ($7.7 billion) (Pollan 2001a). Herbal
2
Formerly “The Retail Food Industry Center.” This Center
is funded by the Alfred P. Sloan Foundation to document and
study how the food industry works, its contribution to the
economy and well being of consumers, employees and citizens,
(http://trfic.umn.edu).
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products and food supplements are largely
unregulated unless sold as a food. They illustrate one pattern of supply chain design. That
is, clockspeed amplifies as technologies move
down the food chain toward the consumer
(Fine). High profits at the retail end increase
the rate of development of new consumer
products, but the scientific development of
substances that, when combined with food,
promise to enhance the health and longevity
of people, moves slowly.
Take for example the introduction of
Benecol into retail stores. This alternative
for butter and margarine has been sold in
Finland since 1994. Its active ingredient, plant
stanol ester, lowers blood cholesterol and is
derived from pine trees. It was brought into
the United States in 1999 by the McNeil
Consumer Health Care Division of Johnson
and Johnson (a pharmaceutical company)
(Sharpe). The FDA prohibited Benecol from
being sold as a dietary supplement because,
by definition, a food supplement is intended
to be ingested as a pill, capsule, tablet, or in
liquid form and not represent a conventional
food (FDA). Benecol was, however, allowed
to be sold as a food with an FDA approved
health claim that it will lower cholesterol. In
a little over one year, from the time it was
brought into the U.S., it was in retail markets.
Common Themes
Common themes and behavior patterns are
emerging as we explore the behavior of the
various sectors of the new food economy in
the context of the clockspeed model. With
the exception of households, most economic
agents are moving from modular, horizontal organizations to more integrated, vertical
organizations. This should not be a surprise
to us. Ten years ago, Tom Urban alerted
us to the “industrialization of agriculture”
(Urban). Identifying the forces and dynamics that motivate firms in the food industry to change their products, processes, and
organization is a necessary step in clockspeed analysis. Identifying ways to measure
the speed of change and finding appropriate
data are greater challenges. One way to summarize the clockspeed of various segments of
the food economy might be to look at the
annual rate of growth in particular activities
over a relevant time period. In mathematical terms, this is the same as measuring the
compound rate of interest. In various sections earlier, the annual rates of growth for
The New Food Economy
1125
selected activities in various parts of the food
chain are reported. Table 6 summarizes the
annual rates of change in various products,
organizational, and process arrangements. It
is offered only as an example. It shows
that rapid annual rates of change are spread
across the food chain. It is, however, dangerous and unfair, to draw any conclusions
about speed from this cursory look at growth
rates because they represent various stages
of product/process development from new
start-ups to mature operations. Nevertheless,
it seems that concentration and the adoption of new technologies happened sooner
at the production and processing end of
the food chain. Consolidation and adoption
of technology at the retail end appears to
be faster and later in time. This is consistent with the hypothesis that supplier power
induces downstream, horizontally organized
firms into more integrated organizations and
that the pace accelerates as it gets closer to
the consumer.
From Chains of Agents to Webs
of Activities
A characteristic of the new economy is the
development of processes and relationships
first, and products later. This seems to typify
much of the race around the double helix of
organizational structure. Emphasis is on how
to get a task done, how to facilitate the sale of
products, how to guarantee safety and quality, and how to deliver the attributes and services being demanded in the most efficient
and profitable way. After all these decisions
are made, the cooperating parties decide on
the actual products and who is in the best
position to perform the task. As economists
we would ask what is the most efficient way
to organize? Who has the comparative or
competitive advantage in performing which
task?
We have typically focused our analysis
along the supply or the demand chain as
depicted in figure 1. It is a nice linear
map that helps us think clearly about economic agents, firms, and consumers. It simplifies public policy analysis and delivery
because it provides a target for regulation
and identifiable beneficiaries for public welfare programs. But in real life, these economic agents rarely perform neatly packaged
1126
Number 5, 2001
Table 6.
Amer. J. Agr. Econ.
Clockspeed—Growth Rates in Various Time Periods
Compound Growth in Percent
Activity
Periods
1967–92
Production/Processing
Global sales of transgenic crops
Global acres in transgenic crops
Percent of farm value under contract
Change in CR4 ratio in:
Chicken slaughter
Cattle slaughter
Poultry processing
All processing firms
Retailing/Manufacturing
Patents by top 25 food manufacturers (92–98)
Sales of organic foods
Sales of dietrary supplements (93–99)
Change in CR4 ratio in:
Retail food stores—all
Wal-Mart store numbers
Wal-Mart sales
All superstores numbers
No. of retail food store units—top 4 chains
Retails food store sales—top 4 chains
Private label penetration—U.S. food retail (90–98)
tasks or buy and sell in linear demand channels. Their relationships zigzag across multiple partners, countries, and consumers. “The
focus (of their strategic plans) is on the
function performed, not on the firm or the
economic agents that perform it” (Boehlje,
p. 1127, parentheses mine).
With this in mind, I propose that we
begin to think about the new food economy less as a chain and more as a web with
food consumption at its center. In figure 6,
each of the vectors radiating from the center represents a set of tasks or activities that
must be performed for food products to be
produced, delivered, and consumed. Twelve
essential activities are identified; surely
more could be added. The twelve activities
are: (1) Adding value to raw commodities
(cleaning, packaging, manufacturing, cooking). (2) Aggregating and storing products for
future sale. (3) Monitoring of product safety
and quality. (4) Waste management, environmental preservation, and recycling. (5)
Managing and training labor. (6) Technology
adoption. (7) Collecting, interpreting, transmitting, and analyzing information about
consumer/customer demands. (8) Basic science and technology. (9) Providing financing
1978–93
1990–2000
1995/96–2000
890
1196
81
25
49
00
13
−30
200
106
210
170
200
76
118
16
and credit. (10) Overseeing and facilitating the integrity of the market, the
welfare of producers, workers, and consumers. (11) Growing crops and raising animals. (12) Transporting products from point
A to point B.
The parts of the web that tie these rays
together are the relationships and strategic
alliances between people, firms, and institutions that perform these activities. These task
performers are positioned in a set of concentric circles around the rays of the web.
Consumers (C) are closest to the center of
the web. They commonly perform eight or
nine of the twelve tasks. They could grow
their own food, transport it, add value to it,
aggregate and store it, monitor its quality and
safety, handle its waste, recycle its packaging, manage and train their own labor, and
adopt many new technologies. Retail food
companies (R) generally perform all twelve
activities except farming, basic science, and
market oversight. Foodservice (FS) establishments perform all the tasks that food retailers do except they do less aggregating and
storage and they are behind in analyzing and
using information technology. Foodservice is
more active in finance and credit than food
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The New Food Economy
1127
Figure 6. Web of activities, economic agents in the food system
retailers; franchise stores are more common
in foodservice. Wholesalers (W) aggregate,
store, and transport products; they monitor
quality and safety, and handle waste disposal.
They have built rather sophisticated information processing systems and they provide
financing and credit to their customers. Food
manufacturers (M), ingredient manufacturers
(I) and most first stage handlers (H) perform all these tasks with the exceptions of
farming, overseeing the market, and providing financing, though with scan-based trading, food manufacturers also extend credit
to retailers. Ingredient and final manufacturers are heavy users of science and technology and data about consumer preferences.
Farmers (F) obviously grow the crops and
raise the animals, handle lots of waste products and control their environment. If they
become an integrated value-added operation,
then they would perform all the tasks of firststage handlers and food manufacturers. Some
of them even become retailers. The seed and
feed companies (S) now often called lifescience companies, are heavily involved in
science and technology, technological development and adoption, and in environmental controls. Government agencies (G) do the
tasks of science and research, information
generation, waste and environmental control,
monitor safety and quality, and more than
any other party, oversee the integrity of the
marketplace and the welfare of consumers
and producers. The media (TV) also has an
important informational and oversight role.
Universities (U) and science laboratories (L)
get involved in monitoring the integrity of
the market, science and technology, and data
analysis. On the finance and credit ray, we
also have institutions like banks (B), government credit agencies, commodity exchanges,
and the stock market (X) who are largely
divorced from other tasks in this industry.
All the tasks are necessary and they may
be integrated within a firm or outsourced
depending on a strategic plan and comparative advantage of potential partners. A firm
that is vertically integrated through ownership, say a food manufacturer, would internalize all tasks and operate (almost) totally
on the circle around the web that connects
the M’s. If they begin to contract with other
firms to supply proprietary products or services, then they are beginning to operate in a
more modular fashion, but can retain control
of the quality of their product through contracts and alliances or the acquisition of new
types of businesses. These connections can be
expected to change with new science, technology, and product demands. Figure 7 illustrates how the connections of the web might
change if a food manufacturer outsources all
transportation and storage to a wholesaler,
labor training to educational institutions, scientific research to government agencies and
universities and all credit functions to banks.
The point is that the activities involved in
creating and transporting food from farm to
fork can be performed by any number of
economic agents even if they are controlled
1128
Number 5, 2001
Amer. J. Agr. Econ.
Figure 7. Hypothetical web of outsourcing relationships for one manufacturer
by a few. The pattern of the web depends
on how integral or how modular production
processes are, and which is the most efficient form of organization for the entire system. Changes in the web’s pattern can change
the quality of food products, the bargaining
power in the supply and demand relationships, and the returns to investment in information, technology, and labor. The closer to
a set of neat concentric rings we see, the
more vertically integrated is the organization
of any set of economic agents. The more integral the organization, the more proprietary
is information and technology, the more vulnerable are they to niche players and the
harder it is to move quickly. When these
circles break up into complex modules with
ever-changing sets of alliances and contracts,
entering the market may be easier for the
successful and lucky entrepreneur, but much
harder for the small and timid seller. Tracking
food safety, quality, raw product source, and
prices becomes harder. The control points
and profit margins tend to shift from sellers
to buyers, from those who produce to those
who analyze, from those with hard assets to
those with the best market intelligence.
The “market” that we know, love, and
teach about, is a relatively friendly and democratic place. Anyone with a product to sell
can enter and leave with their profits if their
costs are right and there is sufficient consumer demand. However in this evolving web
of short-term contracts and long-term property rights, price discovery is difficult and
entry is often by invitation. It is akin to a
de-democratizing of the market-place. The
implications for us as applied economists are
awesome. We need to rethink how our work
applies to the new food economy, to the new
organizational structures, to their rapid evolution, and to their impact on public welfare.
As we witness a rapid acceleration toward
efficiency, let us remember that efficiency is
not conducive to congeniality. It is the product of thoroughly left brain activity unbalanced by the right brains’ creativity, intuition,
and compassion.
In balancing our approach to the new food
economy, we can start by recognizing that
production agriculture always has and always
will perform most essential tasks in the web
of the food and agricultural industry. It is
a consumer of new technologies, bioscience,
and information about demand. It is a supplier to food manufacturers, retailers, and
consumers. It is an essential industry in itself,
but it does not exist unto itself. Before us is
an opportunity to study, analyze and interact with the entire new food economy as
an integrated and evolving system in whatever dimension or environment we choose.
If we can peer through the kaleidoscope of
food, firms, consumers, countries, and contracts and identify the behavioral patterns of
the Drosophila of the food industry and measure their clockspeed, we can employ our
own vast intellectual arsenals to study the
activities we observe. By asking whole-brain
questions we will build better models, and be
Kinsey
more relevant to our peers, our students and
our public.
In the words of an ancient Chinese sage,
Chung-tse, “a well-frog cannot imagine the
ocean, nor can a summer insect conceive of
ice....(each) is restricted by its own learning”
(B. Hoff, “The Tao of Pooh” as reprinted
in Jennings and Haughton). Let us not be
restricted by our own learning!
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