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AEC 2317 Chapter 1 revised FINAL

Uploaded: 5 years ago
Contributor: marshallsmitty
Category: Ecology
Type: Lecture Notes
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Filename:   AEC 2317_Chapter 1_revised_FINAL.ppt (1.44 MB)
Page Count: 49
Credit Cost: 2
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part one: foundations chapter one: The Food Industry Food is one of the great universals in our lives and one of the things that brings us together. Food industry includes all firms, large and small, engaged in the production, processing, and/or distribution of food, fiber, and other agricultural products. It is one of the largest industries in the world. An estimated one-fifth of all jobs in the U.S. are related to some aspect of the food industry. In many developing countries, more than half of the labor force is engaged in agriculture. On a global basis the food industry is the largest industry in terms of people employed and value of product. It is myth that Mom (or Grandma) prepares the Thanksgiving feast—the reality is… Someone other than Mom produced the feed that was fed to the turkey in Minnesota or North Carolina. Someone else converted that turkey on the hoof to the Butterball® that Mom bought at the store. Still another delivered that turkey to Mom’s favorite supermarket in faraway Deming, New Mexico. MAJOR SECTORS—AN OVERVIEW Each “someone” is part of the food industry that prepared the Thanksgiving feast. Mom (or Grandma) was little more than the final actor on the stage when the curtain came down. The food industry can be divided into four major sectors: Farm service, producers, processors, and marketers. MAJOR SECTORS—AN OVERVIEW For every $100 spent at the supermarket… The farm service sector accounts for about $12. The production sector (i.e., farmers), about $7. The remaining $81 goes to processors of agricultural commodities, and the marketing system that brings food to your table. Farm Service Sector The farm service sector provides producers with the inputs such as feed, fertilizer, fuel, equipment, and chemicals. Many firms are multinational corporations with household names such as John Deere, DuPont, and Monsanto. There is also a variety of small, local service companies that serve diverse needs of local farmers for irrigation equipment, farm structures, etc. 2 3 4 Farm Service Sector There are also numerous firms that provide farmers with services such as banking, accounting, insurance, legal advice, and agronomic consulting. As farming becomes increasingly complex, farmers are pressed to rely heavily on providers of farm services—a fast-growing, highly localized sector of the food industry. Producers The producers sector includes all of those firms engaged in the biological processes associated with production of food & fiber. Examples include farmers, ranchers, grove & nursery owners. Producers buy from the farm service sector and sell to the processor sector. 3 4 Producers Unique about producers is the link, often nostalgic, to the biological processes of producing raw food products—Mother Nature. While the link is appealing, most producers are rapidly becoming little more than food factories. Processors The processors sector creates value converting agricultural commodities into those products that consumers want. Processors change the form of food and create value in the process. 4 Processors Processors can be divided into two groups: Commodities processors - (milling wheat into flour). Food products processors - (bakers who turn flour into bread). Frequently, a company engages in both activities: Hershey processes cocoa beans & makes chocolate bars. ConAgra Foods processes soybeans into oil, to make Blue Bonnet®, Fleischmann’s®, and Parkay® margarines. ConAgra Foods also sells soybean oil directly under the Wesson® and Pam® brands. Processors Food product processors can be further divided into: Processors Food product processors can be further divided into: Those that produce for the retail food consumer. Processors Food product processors can be further divided into: Those that produce for the retail food consumer. Those that produce for food service distributors. Today roughly one-half of all spending on food is for food eaten away from home This is the market food product processors serve. Processors A good example of a food product processor is the Coca-Cola Company. It buys high-fructose corn sweetener from a commodity processor such as ADM or Cargill. Processors It combines the HFCS with other ingredients, using their secret formula, to produce Coke®. In cans and bottles for the retail market. In bulk for the food service industry. Processors Following the diagram, we can understand that Coca-Cola also plays the role of wholesaler and distributor in the marketing sector. Coca-Cola spans both the last half of the processing sector and the first half of the marketing sector. Marketers The marketers sector also creates value in the food industry by changing the time and place of food. It brings the consumer what he/she wants, where & when it is wanted. The distribution system that ties producer and consumer together is the marketing system. Marketers The food marketing system is so effective and efficient that most of us take it for granted. Only when the system is disrupted by a hurricane or a massive snow storm do we recognize how flawlessly and easily the food distribution system usually operates. FOOD INDUSTRY CONTEMPORARY ISSUES Like any other major industry, the food industry is in a continuous dynamic of change and adjustment. We will highlight some of the trends and issues in American agriculture. Farm Structure Many are concerned that the family farm is giving way to large, impersonal, factory farms. Today farmers are about 1.6% of the U.S. population. Characterizing attributes of the American farms and farmers is known as the study of farm structure. What do farms and farmers in the U.S. look like today? If there is one lesson to be learned from the study of farm structure in the U.S., it is that there is no such thing as an “average” farm. As in many situations, averages cover up more than they reveal. Farm Structure - Number of Farms In 1915, there were 6.5 million farms in the U.S, and roughly 2 million farms today. In slightly less than a century, we have “lost” about 4.5 million farms. The U.S. Department of Agriculture (USDA) defines a farm as: Any establishment that produces (or should produce) at least $1,000 of farm products each year. Farm Structure - Number of Farms With roughly 305 million Americans, the average American farmer feeds himself & 152 others. Exports account for about another 50, so the average American farmer actually feeds about 200 people. Our food chain, viewed as an inverted pyramid from producer to consumer, has a very narrow base. Farm Structure - Ownership A myth, frequently propagated by the popular press, is that farming is being taken over by large, corporate farms. And the family farmer—owner/operator—is disappearing. Of the 2 million U.S. farms, 98% are family farms producing about 85% of the total value of agricultural production. About 90% of these family farms are owned by sole proprietors, with the rest owned by partnerships or multifamily corporations. Nonfamily farms, currently 2.2% of all farm units, produce 15.2% of total farm output. Farm Structure - Types Recently the USDA has started classifying farms into a typology. Based on the characteristics of the farm operator and value of farm sales. In creating this typology, a critical question is: “What is your primary occupation?” About 14%, or nearly 300,000, responded “retired.” An astounding 40% of farm operators listed their primary occupation as a non-farm occupation. Hobby farmers who primarily work off the farm & maintain the farm as part of their lifestyle. Farm Structure - Types Another 38% listed their primary occupation as farming, with gross sales under $250,000. Assuming a profit rate of 3% of sales, such sales would generate $7,500 profit—hardly enough for family support. Most of these farms actually had sales of less than $100,000. These numbers leave 8%, or about 160,000 farms that are large, economically viable enterprises, that produce most of the food & fiber in the food industry. These few farms produce about 2/3 of farm sales. Farm Structure - Types What is the typical American farm like? In terms of numbers, most are either retirement homes or hobby farms. Almost are family farms, with only about 20,000 large, non-family farms. The clear trend among these food producers is toward fewer, larger farm units, increasingly specialized in what they produce. Legitimizing the term food factories. Concentration A concern which has generated national legislative proposals, is the degree of industrial concentration in some of the food processing sectors. Concentration is an economic concept that refers to the degree to which a small number of firms control a large share of the market. A common method for measuring concentration is the percentage of the total market accounted for by the four (or any other number) largest producers. 87% of U.S. breakfast cereal is produced by the four largest producers. Virtually all baby food is produced by the three largest. Concentration The greatest concentration concern is in meat packing.. 85% of all beef is processed by four companies, which have been rapidly buying out smaller competitors as the industry consolidates. One of these four firms is foreign owned. Concentration & consolidation are crossing species lines that had previously separated processors. Large poultry producer, Tyson Foods, recently bought the second-largest beef processor Some beef cattle producers have called for federal legislation to prevent any further consolidation. Concentration Is concentration bad? Processors say consolidating into fewer, larger firms allows them to cut costs, which benefits consumers. Opponents argue that it provides the processors with unusual market power (the ability of a firm or group of firms to control price and/or quantity traded in a market because of the dominance of the firms in the market), allowing them to buy from farmers with little market power, at prices that border on exploitation. Globalization Globalization is the expansion of firms across national boundaries. In most instances, commodity processors tend to be on the forefront of globalization. Because demand for processing technologies is truly global—we all need food to survive. Among commodity processors, the most successful are very internationalized, with processing facilities all over the globe. To fail to behave globally in the commodity processing business is a recipe for corporate failure. Globalization Globalization in food products processing has not been as strong, as consumers in each country have different tastes and preferences. The final food product soybeans may be soy protein meal in one country, tofu in another, and a nice steak in a third. Many food product processors are making a push to globalize, seeing growth of the processed food market exploding in many developing countries. Growth of the market in the U.S. is basically stagnant. There are three truly global food product processing companies: Coca-Cola, Unilever, and Nestlé. Globalization - Nestlé Nestlé is the largest processor of food products in the world. Their strong suit is the infant formula market. Most Americans associate Nestlé with chocolate bars and hot cocoa mix. Nestlé also appears in this country as Nescafé®, Taster’s Choice®, Perrier®, Friskies®, Alpo®, Mighty Dog®, Baby Ruth®, Butterfinger®, PowerBar®, and Carnation®. Globalization - Criticisms Food security—every country wants to be certain its nutritional needs will be met. As the industry becomes globalized, individual countries are losing control to multinational companies that may have objectives different from those individual countries. Global concentration—similar to the issue of industrial concentration. A Brazilian firm, the world’s largest beef processor has acquired of one of the largest U.S. beef processors. Many individuals are concerned about the loss of national identity associated with globalization. Skeptics see the future of a homogenized world in which French and Swiss cheeses all turn into cheddar. Coordination Marketers are the companies that tie the final food consumer to the processor. Their job is to make certain that whatever the consumer wants is there when and where the consumer wants it. As shown, the traditional retail marketing system is quite distinct from the food service distribution system. The communication system that conveys consumer wants to the producer is called coordination. Coordination Traditionally, coordination has been accomplished by prices sending messages from one link in the marketing chain to the next. This is changing, with management & strategic alliances replacing markets & the price system of allocation. Most food purchased for home consumption is purchased at a retail supermarket. Using technology, consumers can send signals to producers using hotlines, websites & product blogs. Coordination Traditionally, most retail stores purchased food from wholesalers, who purchased in bulk from processors, selling in smaller batches to retailers. Many—particularly smaller—retailers still use this system. Many larger chains combine wholesale and retail functions in a single firm, reducing transaction cost. Reduced costs can be passed on to consumers as lower prices, or captured by the producer as higher profits. Coordination - Kroger & Vertical Integration For many years, the largest food retailer in the U.S. in terms of sales volume was Kroger. It sold about $66 billion of food & other items per year through nearly 2,500 retail outlets. Kroger does both wholesaling & food product processing, with 42 plants making 3,000 products sold by the chain. This illustrates a dominant trend in the food system—vertical integration—combining several steps in the food system chain into a single management system. Coordination - Vertical Integration Vertical integration allows a firm to coordinate different stages in the food system through management. Without integration, coordination is accomplished by the ebb and flow of markets and market prices. With vertical integration as a dominant trend, we are seeing a rise in the role of management. And a decline in the role of markets in the coordination of the food system. Coordination - Vertical Integration What are the pros and cons of non-market coordination? Markets and prices are highly visible—the consumer has many choices. On the other hand, non-market coordination can be more efficient (particularly in large volumes) than market price coordination, resulting in lower prices to the consumer. What does the consumer want—more choice or lower prices? The answer is clear when one compares the successes of Sears (“Good, better, and best”) and Wal-Mart (“Always low prices”) over the past 20 years. Alternative Energy Sources High gasoline prices cause consumers to consider alternatives to petroleum-based energy sources. In recent years, there has been a lot of renewed interest in biofuels—particularly ethanol. Biofuels have been with us for as long as the internal combustion engine. The first diesel engines of the 19th century ran on soy oil. The science of producing biofuels hasn’t changed much during the past century, but the politics and economics have changed substantially. Today, most interest is in ethanol as a gasoline alternative. Alternative Energy Sources - Ethanol What is ethanol? It is a biofuel form of alcohol that can be mixed with gasoline for use in automobiles. Can it be burned? Sure—remember the alcohol lamp you had in your chemistry lab. How do you make it? Humans have been making alcohol for millennia, but our ancient ancestors drank the stuff. Whether in the tank or the tummy, it is essentially the same stuff that is made in the same way. Alternative Energy Sources - Ethanol In the U.S., virtually all ethanol is produced from corn, though other plant sources can also be used. Many have suggested a better U.S. source material for ethanol would be switchgrass or wood pulp. Neither of these alternative sources has sufficient production for a viable industry, nor technology to economically support industrial-scale production. The ultimate objective of using corn-based ethanol is to reduce consumption of imported petroleum. An unintended consequence is an added stimulus to the market for corn—good for a corn producers, bad for corn consumers, like dairy farmers. Alternative Energy Sources - Ethanol Issues associated with ethanol as alternative fuel: Because of its corrosive characteristics, ethanol is more difficult to transport than gasoline. Existing petroleum pipelines can’t handle ethanol. As a consequence, most ethanol is found in the U.S. midwest, where most of our corn & ethanol are produced. Ethanol does not supply as many BTUs (British Thermal Units) per gallon as gasoline. Meaning you need more gallons to go a given distance. Most studies show carbon emissions generated by producing corn & ethanol are greater emissions saved. If every bushel of corn currently produced in the U.S. were converted to ethanol, we would still need imported oil to sustain our current level of consumption. Alternative Energy Sources - Food vs. Fuel? The “fuel-versus-food” argument suggests that converting corn to fuel reduces the amount of food available, driving the price of food upward. Most studies suggest that the impact of ethanol production on food prices is very small. In 1992/93, the U.S. produced about 9.5 billion bushels of corn and no ethanol. In 2008/09, the U.S. produced 12.1 billion bushels and used 3.6 billion bushels for ethanol. Alternative Energy Sources - Food vs. Fuel? Corn available for non-fuel use in 2008/09 was just a little less than that available in past years. Alternative Energy Sources Most ethanol consumption is not driven by market forces, but by government mandates. And a $0.54 per gallon subsidy for producing it. Some observers point out that substituting ethanol for gasoline causes the price of crude oil to fall. True, but note the Chinese consumer benefits just as much as the U.S. consumer, as we are all part of a global market for crude oil. Alternative Energy Sources What is the bottom line on biofuels? As long as we are locked into corn-based ethanol as the only viable gasoline alternative to gasoline, economics and environmental impacts seem to be a wash. Neither is a clear winner. It is safe to say that agriculture is not going to solve the “energy crisis” facing the U.S. Alternative Energy Sources Another alternative energy source is wind power. However, the prospect for wind power in the United States is not bright. While the technology for wind power is well developed, people and wind are spatially separated in much of the United States. There is lots of wind in Kansas and lots of people in New York. But the transmission cost of electricity from Kansas to New York is prohibitive. END

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