The U.S. agricultural pro-duction and food distribution industry is currently in the midst of major structural changes. To assist in understanding the implications of these changes and the future of the industry, faculty in the School of Agriculture at Purdue University in collaboration with industry representatives under-took a study to assess the future of the food production, processing, and distribution system. The results of this analysis are reported in detail in Food System 21: Gearing Up for the New Millennium—winner of a Gold Award for editing from the Agricultural Communicators in Education. Congratulations to Laura Hoelshcer, PhD, Editor, Agricultural Communications Service, for this accomplishment.

In this and subsequent issues we will provide summaries of five key chapters of that book: international trade, consumer demand for food, the hog/pork sector, the beef sector and the grains and oil seeds sector. These summaries will present the “Key Questions & Responses” section, of each chapter which provides a synopsis of the most important issues dis-cussed in that chapter of the book.

You may or may not agree with our analysis. We encourage you to read the complete analysis in Food System 21: Gearing Up for the New Millennium which is available for $29.95 from

Agricultural Communication Service Media Distribution Center

301 South 2nd Street

Lafayette, IN 47901-1232

1-888-EXT-INFO

FAX (765)496-1540

International Trade

Philip Abbott, Thomas Hertel, William Masters, Philip Paarlberg, John Sanders, and Wally Tyner

Recent events in agricultural markets confirm the increasing importance of international trade and other forms of internationalization. When inter-national demand is strong, as in 1995-96, or when there are significant production shortfalls elsewhere, world prices rise, the United States responds with greater exports, and so farm income rises. When demand weakens or surpluses occur here and overseas, export earnings falter, and so does farm income.

Some analysts believe that another watershed has now been reached, that food shortages, not sur-pluses, will characterize future agricultural markets, and that a freer, more open trading system will evolve, leading to more competitive, global markets. This chapter explores these perceptions and high-lights recent events and emerging issues which will condition future evolution and behavior of international markets.

Key Questions & Responses

 

• Will the major trends shaping U.S. agricultural exports change soon?

New destinations and new products have emerged and will continue to dominate trade trends. Potential demand for agricultural products is greatest in Asia and will be the strongest in those countries where economic performance is the strongest and where population is large. Growth markets may emerge, then recede, however, as income improvements no longer stimulate increased food demand.

• Will the trend of increasing high-value and processed food product trade continue?

There is little reason to believe that the trend toward greater trade in higher value and processed agricultural products will reverse. Improvements in the logistics of delivering processed foods, meats, and perishables overseas have made competition in the food industry global. Importing countries will increase domestic production capabilities, especially for meat, so that feedstuffs trade should expand rap-idly, as well. Firms will also increase globalization efforts via foreign direct investment, a strategy which has been more utilized than trade in the past.

• What will determine the extent to which U.S. agricultural exports to Asia continue to grow in the future?

Continued growth in agricultural exports to Asia depends on continued growth in their non-agricultural exports. Therefore, any increase in anti-Asian protectionism in the U.S. likely would lead to a lower growth in U.S. agricultural exports to this region.

• What about food needs in poorer countries?

 

There will continue to be unmet needs for food in parts of the world (especially South Asia and SubSaharan Africa) and even in regions of the successful countries where food demand is growing. Income distribution and effective demand remain the key factors.

Understanding seemingly diver-gent trends in world agricultural markets requires understanding that the same forces skewing the income distribution in the United States, China, and elsewhere are leading to “dual” world agricultural markets. High-income consumers worldwide will demand specialty products in niche markets, which can become quite large and valuable to agribusiness firms. Persistence of poverty will concern some governments, which may intervene in commodity trade to stabilize domestic markets and insure adequate food supplies for a broader set of citizens. Thus, high-value trade is likely to continue to grow and will be more stable than commodity trade.

• Does U.S. foreign aid have any impact on agricultural exports?

Continuation of dietary transitions toward greater meat consumption depends on income growth at the bottom, and hence on whether U.S. and other foreign aid continues to make growth-enhancing investments in Africa and South Asia.

 

• How will GATT and the WTO actually be implemented?

In many countries GATT offers have been set so as not to constrain agricultural policy setting. Those domestic policy concerns will remain paramount, so we should look to these domestic reforms, not to GATT, to see how trade policy will evolve in the future. Pressures will continue, especially from agribusiness, for trade policy reforms and more trans-parent rules governing trade. Rules, hence non-tariff trade barriers, are more important than tariff levels in determining trade outcomes.

• Will an Agricultural Mini-Round in 1999 move toward further reforms, and where?

This is unlikely, because it is impossible to negotiate reforms of agricultural policy without balancing concessions against gains in other areas. Many of the key issues for a 1999 Mini-Round, such as state trading, are areas where the Uruguay Round failed to make progress.

• Will regional integration expand the roles of trading blocks at the expense of multi-lateral negotiations?

Regional agreements have always been more important to agribusiness, because they define more completely the rules under which trade occurs. Thus, there is more pressure for trading blocs, and they may be easier to negotiate. An important concern is that the formation of regional blocs at the expense of multilateral agreements could lead to greater, not less, protection.

• Will entry into GATT/WTO put constraints on important non-members, such as China?

We believe that domestic policy concerns will dominate evolution of agricultural trade policy, and China is no exception. While there may be some reduction in the extent of self-sufficiency, leading to increases in imports, GATT is not important enough to cause China to give up control of her food policy in the name of free trade. China’s latest offer to WTO reflects its desire to maintain self-sufficiency in grains.

• Will reform in the Former Soviet Union and Eastern Europe bring more exporters or importers to world markets?

Food consumption in this region is already at levels found in wealthier developed countries. Income growth following successful reforms will not lead to a surge in food demand, but will open up new niche markets for higher value products. Watch for bulk commodity exports from this region.

• How will possible integration between the European Union and Eastern Europe affect the evolution of these markets?

Integration with the European Union could be important in deter-mining the U.S. share of these markets, but the EU cannot afford to implement its current farm policy in Eastern Europe. Either there will be substantial reform in EU agricultural policy, or Eastern European countries will join under different conditions for agriculture.

 

• What are the implications of the new concerns for environ-mental protection, food safety, and animal and worker welfare?

These issues will prove impossible to negotiate in multi-lateral fora, and domestic policy concerns will dominate. Any political agreement reached in GATT will have little sub-stance. But concerns with the environment, food safety, and animal and worker welfare will be important forces shaping domestic policy, and so will indirectly affect trade.

• How will the role of the private sector evolve?

 

Firms may be well ahead of governments in establishing trading rules through such institutions as ISO 9000 and ISO 14000. Global firms are ahead of governments in pursuing freer trade and establishing transparent rules governing trade. This behavior by firms is likely driving governments more quickly toward liberalized trade.

• How will the reforms embodied in GATT and in domestic reforms such as the new U.S. Farm Bill affect market stability?

One of the hopes of the GATT round was that freer trade would bring about greater stability in international markets. Trade policy will insure that demand growth does not pace significantly ahead of sup-ply potential. Increases in supply will depend on market incentives and on public and private investment in research. Domestic market stability remains an important objective of many countries. Policy implementation will seek to maintain some isolation from the uncertainty of world markets. Thus, many countries will continue to export their instability. Since exporters like the U.S. under GATT have eliminated many stabilization mechanisms, more unstable markets will be the rule.

• How will governments respond to increased volatility?

Farm income in the United States is still dependent on international demand. So with the recent reforms of U.S. agricultural policy, farm income may become more volatile. Public concern for a safety net for agribusiness will be less for an industrialized agricultural sector than it has been for an agriculture based on family farms. Thus, inter-national market forces will revive some of the old policy debates.

Hog/Pork Sector

Mike Boehlje, Kirk Clark, Chris Hurt, Don Jones, Alan Miller,

 Brian Richert, Wayne Singleton, and Allan Schinckel

 

The U.S. pork industry is in the midst of major structural change—changes in product characteristics, in worldwide production and consumption, in technology, in size of operation, in geo-graphic location. And the pace of change seems to be increasing. Pork production is changing from an industry dominated by family-based, small-scale, relatively independent firms to one of larger firms that are more tightly aligned across the pro-duction and distribution chain. The location of the industry is shifting from the traditional production regions of the Midwest to other locales in the U.S. and the world. The industry is becoming more industrialized, more specialized, more managerially intense. The causes of these trends and their impact in the first decade of the 21st century are the focus of this chapter.

 

Key Questions & Responses

• Can small producers compete?

The best answer is yes, but it depends. For producers with old technology who have less than 100 sows, hog prices are expected to cover feed and other variable costs of production, but will likely be inadequate to cover depreciation and other fixed costs. Most producers of this size will be able to continue operating until buildings and equipment need replacement; then they will consider other alternatives.

For those producers in the 100-to 300- (or possibly 600-) sow size cate-gory, networking with other producers in a cooperative or other form of alliance will have high payoff in terms of increased specialization and reduced cost of production, access to markets and market premiums, access to high quality genetics and other inputs, and better information and management skills. Increasing to a 1200-sow size results in even lower costs and better market access both in the input and product markets.

For small-scale producers, the operating principle is not necessarily that you have to be big, but you have to look big through networks or alliances to obtain the efficiency and market access benefits of size.

• Where will the industry locate?

In the next seven to 10 years, the key determinate of location of the industry will be the environmental absorptive capacity of the area. This suggests that the industry is likely to move to those geographic parts of the U.S. and the world that have the lowest population density, the driest climates, and the most attractive communities from an incentive/regulatory perspective. Improvements in transportation efficiencies have resulted in most resources becoming increasingly mobile; and hog production will not necessarily be located in feed surplus regions. This suggests that the U.S. hog/pork sector will likely move to those parts of the Mid-west, the Southwest, and the West that have lower population densities and higher ability to absorb or mitigate animal waste and odor problems.

Access to large-scale packing plant capacity suggests that hog pro-duction will be increasingly concentrated geographically in relatively close proximity to a slaughter plant. Some U.S. pork production companies will locate integrated production and slaughter plants in other countries, including the Prairie Provinces of Canada, Mexico or Latin America, and Australia or somewhere in the Asian continent to supply the increased pork demanded in that part of the world.

 

• Will foreign demand continue to expand, providing opportunities for U.S. exports of pork?

The rising real incomes of consumers in Asia and other parts of the world suggests increased demand for food. And a common response of consumers with growing incomes is to improve the quality of their diet by substituting animal proteins for cereals and vegetable proteins. Increased feed efficiency, combined with improved reproductive performance, should enable pork producers worldwide to reduce absolute costs of production and possibly even narrow the gap between poultry and pork. These efficiency improvements will also likely widen the gap between pork products and higher cost beef products.

The increased incomes of consumers worldwide, combined with the potential for lower pork prices relative to other animal proteins, suggests continued strong export potential. Reductions of trade barriers and less emphasis on self-reliance in pork production will be important determinants. The key concern that mitigates unbridled optimism is the potential of increased pork production in other parts of the world that will compete with the U.S. in an expanding world market.

• How will odor and environmental problems of pork pro-duction be resolved?

In the short to intermediate run (the next five to seven years), envi-ronmental and odor problems associ-ated with pork production will be solved primarily by relocating the industry to areas that have lower population density and less surface water to pollute. In the longer run, technological breakthroughs with respect to feeding regimes have the potential to reduce the total animal waste produced. Other technological advances with respect to building design, waste containment, feed additives, effluent additives, etc., also have the potential to reduce environmental and odor problems.

But it is not clear that these technological fixes will result in the pork industry relocating back to higher population density regions of the country once the infrastructure and support industries have moved elsewhere. This is particularly the case with continued mobility of resources, improvements in transportation and distribution efficiencies, and reduced constraints on national and international resource and product movements.

• Will capital be available to finance the expanded production and processing capacity?

The capital markets are increasingly efficient at allocating funds to those industries and those geo-graphic areas which exhibit comparative advantage. Capital generally has not been a constraint for developing increased production capacity in the industry during the past few decades, and there is little reason to believe that the capital markets will not continue to provide adequate financing for future expansion.

This does not mean that everyone who wants to increase the size of their hog operation has had access to adequate capital in the past or will have it in the future. Increasingly, the capital markets are allocating funds to those who exhibit superior performance in cost control, profit margins, and risk management. Lenders are particularly conscious of risk considerations and will increasingly impose discipline on their customers to be efficient and to use the best strategies in managing risk.

This suggests that an increasing proportion of the production will occur in integrated production/distribution systems, not only to capture the efficiencies of such a system but to reduce the risk exposure in terms of market prices and quantity as well as quality dimensions. Consequently, it will be increasingly difficult for independent producers to access adequate funds unless they adopt cur-rent technology and use management strategies to reduce the risk exposure they and their lenders will face.

• Will the U.S. be competitive as a producing region in world-wide markets?

Relatively low-cost feed and other inputs, combined with modern technology and well developed input and product markets, institutions, and a distribution system, enable the United States and the North Ameri-can continent in general to be very competitive producers and suppliers of quality pork products at competitive prices. These fundamental absolute advantages of the U.S. pork production and distribution sector are not expected to be seriously challenged.

As noted earlier, however, environmental and odor problems may be significant deterrents to locating pork production and distribution systems in various areas of the U.S., making it relatively lower cost to locate production in other geographic regions of North America and possibly even the world. It is highly likely that much of this expansion in pro-duction to meet growing worldwide demand for pork will be by U.S.-based integrated production/distribution firms or alliances, regard-less of whether the plants are located in the U.S. or elsewhere in the world. But the U.S. industry cannot rest its competitive case on low cost alone—it must adapt products to specific markets and provide enhanced quality control and health and safety assurances.

• How rapidly will pork production move to an industrialized model of production and distribution?

Industrialized pork production is now the norm for most expanding firms in the industry. The manufacturing approach to pork production and distribution is essential to maintain quality control as well as to control cost. In many cases, this industrialized model of production and distribution will foster larger scale firms; in 1988, approximately 5 percent of total pork production was concentrated in the hands of the 40 largest firms, whereas the 40 largest firms in 1996 produced approximately 31 percent of the total U.S. pork output. Technological advances combined with continued pressures to control costs and improve quality are expected to provide incentives for further industrialization of the industry.

• Will integrators take over the pork industry?

 

It depends on how you define integrators. The pork industry is expected to be increasingly aligned from consumer back through genetics, but this alignment is not likely to be through ownership, as is common in the poultry industry. A more likely form of vertical coordination will be through joint ventures, contracting, strategic alliances, and other negotiated rather than owner-ship forms of coordination. Pressures will abound to develop more formalized supply chains that increase the interdependence between the various stages in the production and distribution channel.

But it is not clear who will be the chain coordinator. In some cases it might be integrators—production firms that contract others to finish pigs and then market these animals through contractual or other arrangements to the slaughter plants. In other cases, the chain coordinator may be a regional cooperative that owns production and slaughter facilities and has a branded product in the store, or local producers who organize production and processing. In some cases, the integrator may be the feed company or a genetics company.

Various forms of vertical linkages and alliances are likely to occur, depending in part on who is a first mover. The most accurate prediction is that traditional independent pro-duction without formalized linkages both to input suppliers and processors is probably going to be a rapidly diminishing component of the pork industry.

 

• How will food safety rules and quality issues impact the industry?

Concerns about food safety and quality will be major drivers of structural change in the industry, both in terms of the processes used in pork production and distribution, and the coordination of the pork production and distribution chain. Quality concerns will drive more systemized pro-duction and distribution processes to reduce product variability and improve conformance with quality standards and consumer expectations of uniform product attributes.

Concerns about food safety and a drive to qualified suppliers and trace-back will increase the pressures and the payoff of tighter coordination along the production and distribution chain. Pressures for improved quality control and reduction of food safety risk are not expected to abate in the future and will increasingly become a source of strategic competitive advantage exploited by the private sector rather than simply compliance with government rules and regulations.

• Will pork comprise a larger proportion of the consumer’s food expenditures for animal proteins?

Pork has the potential to become an increasingly larger component of the typical consumer’s diet of animal proteins, but this will require an expanded product line, further enhancement of quality, and continued reduction in cost relative to other animal proteins. All three of these goals are realistically achievable, but their accomplishment will require coordinated efforts by all segments of the industry and increased cooperation and collaboration rather than competition among the various segments or stages of the industry.