AgDM newsletter article, July 1999

Four opportunities in an age of growing industrialization

By David Saxowsky and Marvin Duncan, Department of Agricultural Economics, North Dakota State University, 701/231-7441

(second in a series of two)

"If change is inevitable, it is better to spend effort at determining how to prosper under the new environment than to, in a failed effort, stop the change."  This was the good advice of John Lee, Chairman of the Department of Agricultural Economics at Mississippi State University.

Many farmers continue to either disregard or oppose trends toward an industrial style production system in livestock.  Similarly, the argument is made that while some industrialization is occurring in the livestock sector, the crops sector is, as yet, largely untouched by the trend toward an integrated production system.  Hence, we need not consider how to function with an integrated system in the crops sector.

As Lee stated, these views may be self-defeating.  It seems likely that much of the livestock production will take place under a system characterized by coordination across different components of the industry.  Moreover, genetic engineering for specific characteristics in crops will set the stage for retained control by plant breeding firms or processors.  Contractual arrangements will link farmers to seed suppliers and processors.

Industrialization opportunities

What are the opportunities under which farmers can prosper in this business world?  We offer four opportunities in which we believe farmers can prosper.  These will, in some respects, resemble opportunities currently familiar to farmers.  However, in other respects, they will pose new approaches toward developing profitable opportunities.

Producers should look at a variety of options in determining how to prosper in the wake of agricultural industrialization.

1) High volume, low cost producers for a commodity market
The first opportunity is to be a high volume, low cost producer producing for an undifferentiated commodity market.  To be successful in this strategy, farmers must produce at a scale that puts them well out on the long run average cost curve.  With this strategy, farmers will earn narrow profit margins.  But because of their scale of production, they will earn attractive incomes.

This tactic is similar to that currently being pursued in the Western Cornbelt, by Great Plains wheat producers, by large New Mexican or California dairies, by large scale cattle feedlots, and by very large western cattle ranchers.  To succeed, producers must do almost everything right, almost all the time. 

In a competitive market place, these producers must be able to produce at as low a per unit cost as any of their competition, domestic or foreign.  This probably means large capital investments and implies limited use of debt financing.  It also suggests great difficulty for new entrants to get established in the business, unless they come in as partners of those already successful in the business. 

Much of the future U.S. corn and wheat production could be characterized by this model.  This is also a model that supports only a relatively few, widely dispersed communities.

Specialize while diversifying – A challenge of high volume producers is to identify how they can develop and operate a business that allows them to capture the efficiencies of specializing, but at the same time, manage their risk by diversifying.  One suggestion may be for producers to share ownership in a business or businesses that produce an array of commodities. 

For example, a farmers who specializes in wheat production forms a co-owned business with another farmer who produces feeds, and a third producer who raises livestock.  Such a co-owned business offers the benefit of having a member specializing in each commodity it produces, as well as the opportunity to manage risk through diversification.  These businesses will probably not be created through growth, but more likely will arise from the merger of several successful firms that are seeking ways to specialize and diversify simultaneously.

Capture efficiencies – Another challenge is how to capture the efficiency of large-scale equipment to assure timely field operations but at the same time not incur the cost of having the machine idle for 9 to 10 months each year.  Again, cooperating with other producers may offer an opportunity.  But in this case, producers may not be cooperating with a neighbor who needs the machine at the same time.  Instead, the potential co-owners could be producers from several regions of the country with different growing seasons. 

For example, is it possible to share ownership of a combine (combines) among a winter wheat producer in the southern plains, a spring wheat producer in the northern plains, and a corn/soybean producer in the Cornbelt?  Would such an arrangement offer the advantage of ownership, and the benefit of having the machine operating most of the season, without the concerns of relying on custom harvesters?  Would the more intensive use of the machine permit more frequent replacement to assure up-to-date technology?  Would the more intensive use of the machine justify a full-time operator who would operate the machine as it is moved among the owners’ operations?  Does modern communication technology (phone, fax, e-mail) assure the owners will be able to remain in contact despite their disperse location?

2) Specialty product markets with above average profits
The second opportunity is to identify specialty product markets that offer above average profits.  Identifying such niches takes vision, and pursuing them takes courage and nimbleness in production and marketing.   Yet, opportunities for above average profit currently exist and are likely to continue. 

Some examples are production of exotic game animals for food and other products (such as buffalo); organic soybeans (for export to Asia as an example); seasonal produce for sale to local and regional supermarket chains and roadside marketing; and production of seed and breeding stock for commercial producers of crops and livestock.  Specialty markets also can be identified for commodities with unique characteristics.  Businesses can participate in such markets through a contractually linked production system that preserves production identity, or a vertically integrated firm.

Marketing is important – Since these products and markets will be quite specialized, producers will be required to have a good understanding of market trends and product marketing in order to prosper.  Not all specialty markets last forever as high profit opportunities, especially as such markets become oversupplied.  It is important to understand the dynamics of a particular market - knowing when to enter the market, when to exit, and when to move on to another product or market. 

Specialized knowledge of production systems and marketing will be the keys both to prospering as a niche producer and to restricting new entrants into these markets.  Note that scale of production is not the key to success in this strategy.  Family farms can exist and prosper by pursuing specialty markets.

3) Vertical integration
The third opportunity can be found in networking with other producers to create critical mass in production and marketing of products, whether commodity or specialty products. Farmer ownership of input suppliers, processors, and marketers will characterize this approach as farmers seek to move further up the production chain while processors seek to move further down the chain.  In this way, profit margins from additional stages of the input supply, production, processing, marketing and food sales chain can be captured by farmers.  Much of this will likely come as a result of farmers’ cooperative ownership of allied business firms in the food chain.

This strategy maintains farmer independence.  It is consistent with voluntary coordination across the food chain to create product uniformity, to add maximum value to farm production before it leaves farmers control, and to link with consumers who believe farmer control of the food chain helps to assure high quality and high value.

However, this strategy requires top-flight management of the allied farmer-owned businesses and requires that farmers involved in this system coordinate key facets of their production processes.  Current examples of such systems might be sugar beet producers and their cooperatives, tree fruit producers and their cooperatives, and cotton producers and their cooperatively owned gins and marketing organizations.

4) Contractual arrangements
The fourth opportunity can be found in the kind of contractual arrangements that characterize the current integrated production of poultry, swine, vegetable production and processing.  It is also found in certain specialized crop production systems such as minor oil seeds where contractual arrangements with processors are common practice.  This opportunity emerges because consumer preference for uniformity and quality will continue to drive production, processing, and marketing.  Also, technological advances enable greater control to be exercised over each stage of the food system.  We will probably experience substantial increases in the use of these integrated systems.

Rather than simply oppose these systems, it might be more productive for farmers to band together in contracting cooperatives to assure that contract terms of integrated production systems treat producers fairly.  Some would argue that farmers give up their independence and ‘economic manhood’ when they participate in integrated systems.  However, many farmers in the South, East of the Appalachians, and West of the Rockies have long and positive experience in such integrated production systems. 

Summary

These are four alternatives that farmers could adapt in response to the growing trend toward industrialization in agriculture.  Certainly, other alternatives and combinations of alternatives will develop.  New and profitable opportunities will be available for farmers willing to look at their future in new ways.

Change causes uncertainty and uncertainty causes anxiety.  However, the energy associated with uncertainty and anxiety can be put to constructive use in identifying (individually or collectively) new strategies by which farmers can reshape themselves.  Reluctance to participate in industrialization will not preserve lifestyles.  Participating in industrialization will provide an opportunity to direct the impact of the changes.

Of course, participation in the process does not assure success.  As with any broad sweeping change, there will be winners and losers.  Participating in the process will help achieve success, but will not assure success.

Finally, it might be useful to ask what society’s role is in easing the adjustment for those who will be disadvantaged as a result of industrialization.  Sweeping change requires developing new skills and perhaps relocation in order to prosper.  Often the costs associated with such ‘retrofitting’ of a career exceeds the resources of an individual worker or family.  Yet society typically benefits when all participants are gainfully employed at their highest capacity. 

Should society seek to play a role in assisting people to gain new skills and location?  If so, how?  And if society is to play a role, who should pay for it?

 

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