Food System 21: Gearing Up for the New Millennium – Part II

September 12, 1998

PAER-1998-12

John Connor, William Schiek, Joseph Uhl, and Stephen Hiemstra

Introduction

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 issue and a subsequent issue we will provide summaries of three key chapters of that book: consumer demand for food, the beef sec-tor and the grains and oil seeds sector. These summaries will present the “Key Questions & Responses” section, of each chapter which pro-vides a synopsis of the most important issues discussed 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.

Consumer Demand for Food

 

The growth of markets for farm products, intermediate agricultural materials, and finished food ultimately depends on two forces: supply conditions and demand factors. Most of the chapters in Food System 21 deal with the supply side of the American food system. Over time, increases in factors of production and technological progress shift the supply of food and agricultural products such that output increases and prices decline. How-ever, this chapter explores the eco-nomic forces behind trends in the demand for food. These forces on balance also foster increases in the volume of food found in the market place, but they place upward pressures on food prices and contribute to the rising revenues of food suppliers. In sum, one cannot understand the growth of the food system with-out developing an appreciation for the interplay of shifting demand and supply conditions. Omitting the demand side of the picture in Food System 21 would be akin to attempting to cut a piece of paper with only one scissor.

The discussion of this chapter provides a few background facts on U>S> food demand; the drivers of food choices and evidence of their effects on physical food consumption; evidence of actual sales impacts from major and continuing trends in food purchases or food industry sales.

Key Questions & Responses

 

  • Are consumers consistent/predictable in their food choices?

 

Many individual consumers are not, and most (to put a charitable twist on it) are fickle. However, in the aggregate, groups of consumers do act as if they plan their purchases with due consideration of their ability to pay, the relative costs of all items they must buy, their house-hold’s structure, and the many pieces of information bombarding them daily on food-health connections.

  • Why is a downward revision in the Consumer Price Index relevant?

A downward revision in the CPI explains why the effects of income increases on food choices (trading up) are so strong. The CPI as currently measured makes personal income growth appear to be more anemic than it really is. Consumers can afford to be more fickle than previous generations.

  • What are the key drivers of aggregate food demand?

Income growth has surpassed population growth, but these two fac-tors are the greatest forces explaining long-term changes in total food expenditures. The increasing cheap-ness of food was always a weak explanatory factor, and it is fading further. However, prices still strongly affect the mix of foods purchased, generic-type (unbranded) foods, and all the purchases of low income households.

  • What role do demographic changes and consumer preferences play in food choices?

Along with relative prices, demo graphic and attitudinal changes play strong roles in the mix of foods being purchased at retail. While aging, dual-career families, ethnic composition, nutrition concerns, and beliefs about food-health relationships are each important determinants of food choices, many have conflicting or off-setting effects on food expenditures.

  • How important are vegetarianism, biodegradable packaging, organic farming, animal welfare concerns, direct farmer marketing, or home gardening as drivers?

These are important issues to small slices of the consuming public, but in the aggregate most farmers, processors, and distributors can ignore them when making major investment or strategic decisions.

  • Are consumer desires for fresh-tasting low-fat, low-sodium, ethnic-identity, snack-type, and convenience foods just fads?

Over the next decade or so, producers and food companies that ignore these drivers do so at their peril. Consumers are willing to pay more for food products that incorporate one or more of these value-added features. But products that are merely novel or sacrifice storability, palatability, or other features that consumers have come to expect will flop.

  • Is the FDA-USDA Food Pyramid a good road map to the future?

Except for its pinnacle, the pyramid is a good general descriptor of long-term consumption trends. Consumers are buying more starch foods, fruits, and vegetables, and they are shying away from meat and dairy fats. Unfortunately, they are buying more vegetable oils and sweeteners as well, driving up the average calorie count to unhealthy levels.

  • Do consumers want more government involvement in the U.S. food system?

When it comes to protecting the U.S. food supply from toxins, bacterial hazards, adulteration, or unsafe processing practices, public support seems almost unlimited. Information about nutrition, ingredient composition, and health linkages is also popular, whether from government, industry, or nonprofit organizations.

Consumers seem to be indifferent about approval of more food additives or government grading systems.

  • Will food expenditures continue to decline from today’s average 15 percent of the total?

The rate of decline is slowing, so by 2010 the ratio may drop to 14 per-cent, but no lower.

 

  • Is it possible that the consumer’s share of the food dol-lar spent on foodservice will rise to more than 50 percent in the future?

Yes. Retailers are fighting back, but a percentage in the 50-55 range seems likely by 2010 if the U.S. economy continues its robust growth path of the last 15 years. If a serious recession hits, the figure will drop but still hover near 50 percent.

Grains and Oil Seeds Sector

Craig Dobbins, Howard Doster, John Lee, Jess Lowenberg-DeBoer, George Patrick, and William Uhrig

 

The production of corn, soy-beans, and wheat represents a significant proportion of the value of U.S. farm production. In 1995, the sales of these commodities resulted in cash receipts of $39.4 billion. This represents 21.4 percent of all cash receipts and 39.4 percent of cash receipts from crops. The methods of production, the inputs used in production, and purchasers of these products have undergone many changes in the past few years. Many of these same forces will continue to shape future grains and oil seeds production.

In 1995, 30.2 percent of the coarse grains, 36.6 percent of the soybeans and 58.0 percent of the wheat produced in the U.S. were exported. The internationalization of these markets means that changes in production, level of consumer income, and trade policies of other countries will have important implications for the U.S.

The international nature of these commodity markets, while important, is not the only factor important in shaping the grain and oil seed sec-tor. Other forces shaping the future of this sector include the development of specific-attribute grains. While this is not a new development, the application of biotechnology to plant breeding promises to increase the speed with which new products are developed. Production technologies will also change in other ways. The development of sensors will result in “smarter” machinery, allowing more precision operation and “on the go” adjustments.

Technologies of the future will be more complex and more information intensive. Information technologies will play an important role in man-aging the increased quantities of information. While the application of information technologies in the form of site specific or variable rate technologies does not appear to result in reduced input costs, this technology may allow managers to increase their span of control.

Government policies will also continue to influence the direction of the grains and oil seeds sector. Agricultural policy and environmental pol-icy will have important implications for the sector. Some effects of the policies will be direct or intended, but others will be indirect or unintended.

Being a low-cost producer is critical to success when producing commodities such as corn, soybeans, and wheat. While the development of specific-attribute grains will provide early adopters opportunities for a larger margin when compared to traditional commodities, this larger margin is expected to quickly narrow.

Implications discussed in this chapter include the continued consolidation of grain elevators, the continued dominance of bulk commodity production, the continued growth in farm size, the skills needed by farmers to be successful, the ownership of farm assets, the profit level of farming, and changes in land values and cash rent.

Key Questions & Responses

  • Will bulk commodities continue to dominate production?

The application of conventional crop breeding programs and biotechnology will result in an increased number of specific-attribute grains and oil seeds. Those items for which there is a large demand will quickly be treated like today’s commodities, resulting in a number of “bulk products.” Today’s commodity corn, soy-beans, and wheat will fall into this category. The use of sensors and information technologies will allow the specific attributes in these grains to be quickly assessed and communicated to producers.

The marketing system will reward those who provide a superior quality product by basing the price on the quantity of the desired attribute rather than the volume of grain delivered. Both contract and non-contract marketing opportunities will be available. For items that have smaller demand or more specific functions, identity preservation will be important. These products will be grown under contract. To successfully compete in these markets, farmers will need to emphasize cost control and continue to strive to be low-cost producers.

  • What will be the greatest advantage of variable-rate technologies?

Yield monitoring will be the first component of the variable-rate technology to become widely adopted. Machinery manufacturers already offer yield monitors as standard equipment on combines. The data that are collected from these tools will allow farmers to observe variability in yields without being on the combine. These data will also allow yield variations to be evaluated with respect to weed pressures, insect infestation, plant population, and rainfall amounts, in an effort to explain differences in yields.

The other aspects of variable rate technology, the variable rate application of fertilizer, seed, and chemicals, appear to provide little cost savings in the production of bulk commodities. Their major advantage will be the ability to provide the farm manager a much larger span of control than can be achieved through direct observation.

  • Will fewer grain buyers mean lower prices for farmers?

During the next decade, the trends of change in the grain indus-try will be much the same as in the past decade—but the rate of change is expected to accelerate. This con-solidation could result in lower prices, especially for smaller farmers and some market areas with only a single buyer. There will be less interest on the part of the larger grain merchandising firms in serving as a point of sale for small producers.

Larger farmers will have a larger number of marketing alternatives, but they will be required to deliver grain to more distant points in order to take advantage of these opportunities. Those farmers who have a volume of production sufficient to afford their own transportation equipment will be able to reach these more dis-tant terminal and sub-terminal alternatives in a cost-effective manner.

Larger producers with substantial grain handling facilities and specialized management will also be able to take advantage of special merchandising opportunities by blending or differentiating their grain. These producers may find a ready market for their grain with large livestock and poultry operations and local grain processors. For small and medium-sized producers to receive bids similar to those of large producers, they will have to coordinate sales with others. This will allow smaller sellers to appear to purchasers as a single large producer.

To be continued in Food System 21: Gearing Up for the New Millen-nium – Part III.

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