The Industrialization of Agriculture:
Policy, Research, and Education Needs

A Symposium

July 1994

Acknowledgements

C-FARE is grateful to the following agricultural scientists who came to Washington, D.C. in May 1994 to examine the known and potential impacts that industrialization is having on the agricultural sector:

Ralph Christy, Cornell University; Kate Clancy, Syracuse University; Mike Cook, University of Missouri; Mark Drabenstott, Kansas City Federal Reserve Bank; Dave Ervin, Office of Technology Assessment/Oregon State University; Dick Gady, ConAgra; Susan Offutt, National Research Council; J.B. Penn, Sparks Companies; Katherine R. Smith, Henry A. Wallace Institute for Alternative Agriculture.

In addition, we would like to thank the individuals representing agribusiness, the executive and legislative branches of the federal government, state and local government, academia, professional societies, and public interest groups, who enthusiastically discussed the topic of agricultural industrialization. Many of the policy, research, and educational needs they identified were incorporated into this synopsis.

C-FARE Board of Directors

Executive Summary

This report summarizes the findings of a symposium on the "Industrialization of Agriculture: Policy, Research, and Education Needs" held in Washington, D.C., on May 12, 1994, sponsored by the Council on Food, Agricultural, and Resource Economics (C-FARE). The symposium sought to integrate information about the nature of industrialization and its effects on policy, research and education. As industrialization (consolidation of farms into larger units and more extensive contract production) continues to develop, the emerging food and fiber system is expected to be highly competitive in global markets, more efficient, more responsive to consumer demands, less dependent on government assistance, and able to more rapidly adopt new technologies.

However, the symposium discussion indicated that many critical questions need investigation. As examples: What is the effect of industrialization on rural communities and income distribution? How does industrialization relate to food safety and the environment? Does it enhance the global competitiveness of U.S. agriculture and geographical shifts of production? Will small farmers survive the shifts now underway? How does industrialization influence market information and public versus private sponsorship of technology development, research, and education?

Participants in C-FARE's symposium concluded that surprisingly little is known about answers to these and other questions. Dramatic changes are anticipated for the future structure of agriculture, and it is important for the agricultural policy, research, and education agendas to address these issues now.

Introduction

The agricultural research and education agenda in the U.S. currently focuses on a range of interrelated issues such as consumer demand, economic viability of the farm sector, global competitiveness, effective technology utilization, new uses for agricultural products, natural resource management, and rural development. Analyses of such issues are critical for a healthy and robust agricultural sector; however, they will only be effective when analyzed in their proper context. Today, that means recognizing the impact that industrialization is having on the agricultural sector.

Industrialization in agriculture refers to the increasing consolidation of farms and to vertical coordination (contracting and integration) among the stages of the food and fiber system. The emerging system is expected to be highly competitive in global markets, more efficient, more responsive to consumer demands, less dependent on government assistance, and able to more rapidly adopt new technologies.

However, there are many critical questions that need investigation. What are the likely impacts of an industrialized agriculture on rural economic prosperity, environmental quality, food safety, and income distribution? Will small farmers survive the structural changes now underway? If so, will they be autonomous producers, or will they be contract producers with little freedom to make production and marketing decisions? Will the emerging structure cause a shift in the geographic distribution of production and subsequent environmental problems? The answers to these and other questions will help policymakers, researchers and the public understand the implications of continuing structural changes in American agriculture.

In recognition of these and other concerns, the Council on Food, Agricultural, and Resource Economics (C-FARE) sponsored a symposium in Washington, D.C. on "The Industrialization of Agriculture: Policy, Research, and Education Needs." C-FARE is a nonprofit group of agricultural economists which has as one objective the identification of key economic issues in agriculture. The select audience of 75 individuals representing agribusiness, the executive and legislative branches of the federal government, state and local government, academia, professional societies, and public interest groups, enthusiastically discussed the topic of agricultural industrialization. Participants identified policy, research, and educational needs related to industrialization.

This report highlights the major points from each presentation and discussion. Included are views on the forces shaping industrialization; a public policy perspective on current and future farm policy; some potential implications for the environment, rural communities and citizens, food safety, agribusiness, and production agriculture.

I. Industrialization of Agriculture: Steady Current or Tidal Wave?

Mark Drabenstott, Federal Reserve Bank of Kansas City. The industrialization of agriculture is both a steady current and a tidal wave. While it is not new, it is speeding up. Drabenstott attributed this trend to two powerful forces -- a new consumer and a new producer. The new consumer is highly discriminating and demands customized food products to meet changes in lifestyles and eating habits. The new producer is armed with advances in biotechnology, mechanical and information technology to more efficiently meet consumers' needs. "A more demanding consumer and more capable producer would seem to be a match made in heaven -- and to a considerable degree it is."

The only problem is that the traditional markets that have moved food from farmers to consumers do not broker these types of marriages very well. The traditional markets were developed to trade general commodities like yellow corn, and hard red winter wheat. But consumers now want tailored foods, and to assure that they get them, processors often want more specific farm products. In many segments of U.S. agriculture, processors are contracting with producers and/or purchasing production facilities in order to assure access to specific types of inputs.

Another force contributing to industrialization is that a growing and significant portion of the new generation of agricultural technology is not only specific, it is also proprietary. Companies that invest heavily to develop new technologies naturally want to capture their returns. Capturing those returns, in many cases, means controlling the production, processing, and marketing of the resulting products.

Drabenstott sees five things on the horizon for the agricultural sector. First, he believes that the tempo of change will quicken as has started in the hog industry. Second, livestock segments will probably move toward industrialization before grains. Third expect two agricultures. Commodity agriculture will have a narrow profit margin and producers and processors will operate at low cost and high volume. Specialty production will have higher profit margins because more value is added. Fourth, new waves of technology seem sure to continue sweeping agriculture, making producers and processors ever more able to hit ever smaller consumer targets. And finally, he expects fewer government contracts with producers such as commodity programs.

He believes that industrialization makes agriculture less unique and more like many other industries. Consequently, it becomes less defensible to argue that agriculture is special, and thus deserving of special treatment. Policymakers and the agriculture community are faced with several policy dilemmas. Should we continue a commodity policy for a product industry? Should we save traditional farms or benefit consumers? Who will monitor the "market" and provide information? Will new public policies be needed to assure market assess and to control market power?

II. A Policy Perspective

J.B. Penn, Sparks Companies Inc. "The policy structure that exists today is fundamentally out of synch with the reality of the agricultural sector." Penn also suggested that farm policy lacks a clear and compelling objective and it can no longer be justified on a farm/urban income disparity basis, nor can it be justified as a means for rural development since farming has diminished in economic importance in most rural counties. Yet traditional farm policy continues to be perpetuated, relatively unchanged in the face of significant structural changes. This situation makes it all the more difficult to address the real problems, those arising from the industrialization of agriculture.

Penn indicated that the 1985 farm bill was a turning point, with Congress recognizing the importance of foreign markets and of being competitive in those markets. At the same time, farm policy began to decouple federal payments from output in certain programs and for certain commodities. Many analysts thought this trend would continue, with benefits becoming progressively smaller due to budget cuts and other pressures, and more and more farms would opt out of the federal programs. Eventually, farm programs would disappear.

However, in 1994, Penn has noted several undercurrents that could alter this trend. First, farm groups are actively seeking ways to preserve their benefits. Second, environmental groups are becoming more active in farm policy and will demand changes in existing programs. Third, a new world trade order is developing where it is no longer effective, fashionable, or practical for countries to intervene in agriculture markets to advance a domestic objective. The result is a farm policy under attack from all sides.

Penn suggested that the agricultural establishment has long avoided facing the reality of industrialization, perhaps because they have had a self-interest in not recognizing the changes. Nonetheless, agribusiness is making changes even if the policy establishment is not. Agribusiness is doing its own research, buying information services, and hiring consultants to help it identify and adjust to the changes. The agricultural establishment needs to respond by building public support for newly oriented research and education for the food industry. As Penn urged, we need to do this "passionately, as if our livelihood depends on it," because it probably does.

III. Policy, Research and Education Implications Panel

1. Resources and the Environment

Dave Ervin, Office of Technology Assessment/Oregon State University. The inability of analysts to accurately value the costs and benefits of environmental change is still one of the biggest problems in natural resource management. According to Ervin, this difficulty is compounded in agriculture because a diverse array of farms generally emit nonpoint source pollution, making it almost impossible to trace pollution back to the source, and unwise to mandate standardized pollution control practices. Ervin believes that industrialization could improve technology innovation and adoption in response to environmental programs because of better management and easier access to capital. This new structure may also invite more government regulation because larger, more integrated producers are viewed as corporate farms, not family farms. Regulators may decide to target these corporations for environmental compliance, rather than focusing on independent farmers. It is uncertain whether industrialization will shift environmental problems from one region to another. However, the tendency for industrialized farms to grow very large will concentrate large amounts of waste in certain areas and inevitably lead to waste disposal problems.

2. Rural Development

Ralph Christy, Cornell University. Greater consolidation and coordination among stages of production is expected to continue influencing the economic vitality and social well being of rural communities. In many rural areas, the economy has undergone a major industrial transformation over the last 25 years in which farming, farm-related industries, and agricultural policies have a reduced role in rural employment and income generation. In other areas, however, the economic health and structure of the agricultural sector continues to strongly influence rural economic vitality. It is expected that the impact of agricultural industrialization on rural communities will be greatly influenced by a community's proximity to metropolitan centers. If production contracts and integration are initiated from outside rural areas, there will likely be an initial increase in economic activity and jobs. However, management expertise, input supplies, and financing activities could flow from rural areas to non-local beneficiaries. Such a transfer of skills could leave rural communities more vulnerable to future economic hardships. In an alternative local-based model, agricultural producers and other local agribusiness could organize a negotiating body to initiate coordination with processors and other food companies. Such initiatives would be more likely to retain local expertise and higher skilled jobs. While both models have been followed to date, it is clear that additional research and education are needed in order for the local-based approach to compete effectively.

3. Production Agriculture

Mike Cook, University of Missouri, pointed out three major implications of industrialization on production agriculture: the optimal boundary of farms will likely change, coordination between levels within the food system will become more centrally controlled, and the output mix on farms will change in response to new signals from food processors and other contracting entities. The direction and magnitude of these changes are currently uncertain but will depend on both production and transaction costs. Cook also described many of production agriculture's research and education needs in an industrialized food system. Research is needed on the relationships between government programs and the structure of agriculture. What role will information and knowledge generating institutions play in the new food system? How will other policies related to anti-trust, tax, and environmental issues influence industrialization? What will be the optimal incentive structures under an industrialized system? Finally, Cook stated that farmers will need education on how to acquire and analyze additional market information to be competitive in the new structure. Farmers will also need to not only manage commodity price risk, but also new risks such as portfolio risk, product quality risk, and contractual hold-up risk.

4. Agribusiness Perspective

Dick Gady, ConAgra, questioned the general statement that industrialization is accelerating. With one notable exception, the pork industry, many food products have been coordinated for decades with no significant increase in coordination in recent years. Gady identifies low profit margins as one pressure that has led the industry to vertical coordination. Industrialization is a way of trying to find niches in the market chain and searching for ways to invest that might have a little higher return. He presents the red meat industry as an example of an industry forced to integrate backward to survive in a low profit margin, high capital expenditure period. Gady went on to express frustration that industrialization has been associated with environmental problems such as food safety, soil and water depletion, and sustainability when we don't yet know how industrialization will affect environmental quality. He addressed each issue separately and said "let's give credit for modern technology and commercial agricultural achievements." We need unbiased analysis to identify problem areas, and then we need to make plans to attack them.

5. Food Safety and Quality

Kate Clancy, Syracuse University, said that at the individual level, as opposed to a collective level, "the problem most closely related to industrialization (besides jobs) is probably food safety." Clancy cites microbial contamination of poultry, antibiotic residues in animal products, and unnecessary food additives as prime examples of food safety risks related to industrialization and centralization. She links these problems to practices used in industrialized systems such as confined animal production. Clancy questions the necessity of such practices when studies have shown that many consumers are willing to pay more for foods that are produced in ways that make them safer, that preserve their quality, and that benefit local businesses. Clancy criticized the welfare losses and consumer overcharges in the food processing sector, and described the relationship between structure and the "maniacal proliferation of new food products as frivolous and socially wasteful." It is not surprising that most of these products fail, and for this reason she suggests we should be quite leery of those who attribute industrialization to consumer demand.

IV. Focus on Policy Implications of Industrialization

Discussion leader: Susan Offutt, National Research Council, "So, what difference does the industrialization of agriculture make in public policy?" Offutt led the audience through an interactive discussion which identified several key issues/concerns. Five major points are mentioned.

Environmental Policy: Industrialization may alter the focus of responsibility for attainment of environmental quality goals. With vertical integration, more farmers contract with fewer processors, on whom legal liability for environmental degradation may fall as a matter of regulatory convenience.

Commodity Programs: What does the persistence of commodity programs mean in an industrialized food and agriculture sector? The largest growth in exports is in value-added food products, not commodities. Do current programs move us where we want to be in the international markets?

Producer Empowerment: How will industrialization affect the autonomy and empowerment of producers? It seems likely that producers who contract with processors will lose some control over how they produce. If so, how will these producers respond to farm policy incentives and/or disincentives? Will they have enough autonomy to modify production methods in response to signals from policymakers?

Public Interest: As agriculture becomes more industrialized, how can and/or how should public interests be brought in to the federal farm policy decision process? Examples of public interests include environmental protection, diversity of farm size and ownership, food labeling, competitive food prices, food safety, and rural employment.

Policy Integration: Farm and environmental policy will likely need to be more integrated to achieve social and economic objectives such as worker and food safety, and rural economic prosperity.

V. Focus on Research and Education

Discussion leader: Katherine R. Smith, Henry A. Wallace Institute for Alternative Agriculture. Smith presented three questions to the audience and probed them for ideas and suggestions. Her questions and audience responses are presented below.

Question 1. What unanswered questions and/or researchable issues are implied by the discussion we had today?

Participants enthusiastically responded with numerous suggestions for research questions, mostly related to rural prosperity, trade, natural resources, food safety, and technology adoption. Many are listed below: What is the effect of industrialization on rural economies and income distribution? Does industrialization affect trade patterns and the ability to compete in world markets? How will industrialization affect the factors of production, such as land markets? What alternative institutional arrangements are needed to support, promote, and monitor an industrialized agricultural system? How does industrialization relate to food safety? How will industrialization change the funding of new technology development and the subsequent benefits distribution? Will it cause a shift away from the public sector to the private sector? How will industrialization affect the adoption of new technology? How will biological diversity be affected by industrialization? How does industrialization influence the needs for, and sources of, financial capital for agricultural production?

Question 2. What are the education needs?

Participants generally agreed that significantly more education is needed, both within and outside the agriculture establishment. Educators, extension agents, and agricultural scientists across disciplines need to understand the industrialization issue, its implications for agriculture research, and the policy issues involved. Several people also stressed the need to increase public understanding about the costs and benefits of our food system, and the policy process that guides the sector. Several participants expressed concern over the apparent shift of human capital from the public to the private sector. One person asked, "who will teach the next generation of poultry scientists when poultry experts are going to the private sector?" Another stressed the need for institutional support for scientists working in basic science and applied technology so that research skills at the universities are maintained as a source of basic knowledge about agricultural science.

Question 3. Can existing research and education institutions do the job?

The audience agreed that to meet new research and education needs, existing institutions would have to change. Some suggested that continued industrialization of agriculture will bring increased emphasis on interdisciplinary research, education, and communication. Adjustments in existing institutions will need to redefine public research and education roles, the relationships with private firms, and ownership and transfer arrangements for new technologies developed through public and private partnerships.

VI. Summary and Conclusions

Effective public policy depends upon a clear understanding of how the structure of the agricultural sector will impact public and private goals. While this may seem obvious, participants in C-FARE's symposium, "The Industrialization of Agriculture: Policy, Research and Education Needs," concluded that we know surprisingly little about the implications of industrialization on rural communities, environmental quality, food safety, income distribution, technology adoption and development, and production agriculture. As a result, the policy structure that exists today is fundamentally out of synch with the reality of the sector.

Participants generally agreed that as industrialization continues, dramatic changes are likely to occur in farm and environmental policy, producer autonomy, and the geographic distribution of production. C-FARE urges the agricultural policy, research, and education communities to consider the impact industrialization is having public and private goals.

Council on Food, Agricultural, and Resource Economics

Background and Mission

C-FARE was created in 1993 to strengthen the national presence of the agricultural economics profession and to enhance its effectiveness. C-FARE is actively working to:

• prioritize and publicize key economic issues within the research, extension, and resident instruction agendas;

• help agricultural economists contribute more effectively to public and private sector decisions;

• establish linkages with organizations and institutions for the benefit of the entire profession;

• work with other disciplines on issues of mutual concern.

In pursuit of these goals, C-FARE will continue to conduct priority setting exercises for input into funding processes, develop nonpartisan issue papers to enhance the policy dialogue, and hold policy briefings on key economic issues.

If you would like more information about C-FARE, please feel free to contact any member of the C-FARE Board (listed in front), in addition to:

Walter J. Armbruster Chair, C-FARE Farm Foundation 1211 West 22nd St., Suite 216 Oak Brook, IL 60521-9580 Tel: (708) 571-9393 Fax: (708) 571-9580

Tracy Irwin Hewitt Washington, DC Representative, C-FARE 5657 N. 8th Street, Arlington, VA 22205 Tel: (703) 524-2145 Fax: (703) 524-2335 itracy@aol.com

All material contained in this report may be used without permission provided credit is given.

C-FARE Publications

Symposium Summaries

	2000	Smart Environmental Policy for Animal Agriculture... (1.4 mb)
	1999	Partnering in Ag. Research and Education: Symposium Highlights (152 kb)
	1998	Keys to Agricultural Growth & Profitability (127 kb)
	1998	Keys to Agricultural Growth & Profitability Summary (101 kb)
	1997	Economics Research and Education Priorities (762 kb)
	1997	Economics Research and Education Priorities Summary (219 kb)
	1995	Agricultural Research Assessment (58 kb)
	1994	The Industrialization of Agriculture (37 kb)

Other C-FARE-Related Publications

	"Rates of Return to Public Investment in Agricultural Research and Education." Barry, Peter. (Contributing authors: Alston, Gardner, Hewitt, Huffman, Norton, Phillips). Choices, Fourth Quarter, 1997, pp. 13-15.
	"Doing Good by Choosing Well: Priorities for Agricultural Economics." Ahearn, Mary, Henry Bahn, Peter Barry, Sam Cordes, Tracy Irwin Hewitt, George Norton, Katherine Smith, and Amy Thurow. Review of Agricultural Economics, Fall 1998.

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