Consolidation in U.S. Agriculture:
The New Rural Landscape and
Public Policy
Emily Kearney
Outline
(Source: Drabenstott, Mark. Federal Reserve Bank of
Kansas City Economic Review v84, n1 (1st Quarter
1999): 63-71.)
1.
A New Wave of Consolidation


2.
3.
Cost-savings consolidation
Supply-chain consolidation
Implications of Consolidation for U.S.
Agriculture
Public Policy Issues
Background



At the beginning of the 19th century 90
percent of U.S. population involved in
agriculture; today just 3 percent.
Consolidation has been ongoing; what is new
is the type and speed of consolidation
Two types:
–
–
Cost-savings
Supply-chain (vertical integration)
Questions Addressed
1.
What does consolidation mean for U.S.
agriculture and it participants?
2.
What issues, if any does the wave of
consolidation pose for public policy?
Cost-savings Consolidation



Low prices for agricultural commodities have
spurred mergers to move down production
costs (Cargill, Continental)
1998: more voluntary exits, farm auctions;
profit margins are thin: “get big or get out”
Fewer, bigger farms can capture economies
of scale
–
Capital and technology have boosted productivity
Supply-Chain Consolidation


All stages of production, processing and
distribution are bound together (vertical
integration)
Effect: a handful of chains dominate
production
Changes to agriculture

Supply chains change…
–
–
–

How agriculture does business: contract production rather
than spot production
Where: concentrates production near processing facilities
Who: “concentrates production in the hands of savvy
producers who can manage tight production controls and
negotiate sturdy long-term alliances”
Supply chains prefer coordinating fewer rather than
many players to keep transaction costs low
II. Implications of Consolidation for
U.S. Agriculture

Lower Costs
–

Economies of scale
Consumer and Competitive benefits
–
–
Lower food prices (but…monopoly power?)
More competitive in world markets
Implications of Consolidation for U.S.
Agriculture

“New Business Challenges for Producers”




Pushing costs down to survive in a market with thin
margins (technology= low costs, high productivity)
Stay in the game while players getting bigger
Local farmers left without competitive buyers
Dramatic Redrawing of Rural Landscape



Diminishes what has traditionally been a strong link
between agriculture and local suppliers
Profits drain out of local areas, don’t recirculate
Fewer farm communities will be viable
III. Consolidation and Public Policy
Issues

Slowing the Pace of Consolidation
–
–
–
If not, will put strains on farm families and
communities to even greater degree
Trend will continue as long as prices are low
Need to restore growth in world food demand and
boost U.S. exports

stronger export growth will lift food prices and in turn will
mitigate (the pace of) rural impacts
III. Consolidation and Public Policy
Issues

The Geography of Consolidation
–
–
Concentrating in new areas, shifting away from
traditional patterns
Need for national environmental standards for the
livestock industry


Would provide a more level playing field, push location
decisions to the local level
National threshold issues would also create a more
stable business climate and encourage investment in
the US
III. Consolidation and Public Policy
Issues

The Rural Impact
–
–
–
–
Many rural communities will be forced to find new
economic engines
Effects on communities will be even greater than
effects on farmers
“Put simply, many rural communities face a make
or break period in the years ahead
Ultimately responsibility for economic futures falls
to communities themselves. But…..
III. Consolidation and Public Policy
Issues

Future is also shaped by Public Policies





Financial markets- have less capital options, need equity
and other forms of capital
Telecommunications- economic salvation?
Infrastructure- highways, bridges, sewer systems
Business Assistance- mostly techincal
Research and Technology- need rural focus
Conclusion



As long as commodity prices stay low,
consolidation is likely to accelerate
This means a painful transition for rural
communities
However…

“Consolidation is generally favorable for U.S. agriculture
and the U.S. economy. It will yield a lower cost
structure, which in turn will lead to lower food prices and
more competitive U.S. food and farm products in world
markets.”