March 5, 2012

Multi-country Analysis of Strategic ISAgribusiness

Julia Allis, Chenzi Qian, Joshua Kitlas

Allis, Qian, Kitlas

Contents1 Industry Demographics................................................................................3

1.1 Total Industry Size.................................................................................3

1.2 Main Products & Services......................................................................4

1.3 Top Global Companies by Market Share...............................................4

1.4 Financial Analysis of the Industry.........................................................5

1.5 R&D Spending.......................................................................................5

1.6 IT Spending............................................................................................6

1.7 Extent of Globalization...........................................................................6

2: Industry Strategic Analysis.........................................................................7

2.1 Competitive Rivalry in the Industry.......................................................7

2.2 Threats of New Entrants........................................................................8

2.3 Threat of Substitute Products or Services.............................................8

2.4 Bargaining Power of Customers............................................................9

2.5 Bargaining Power of Suppliers..............................................................9

3: Strategic Information Systems Analysis.....................................................9

3.1 Supply Chain Management..................................................................10

3.2 Communication Technologies..............................................................10

3.3 Customer Relationship Management...................................................10

3.4 Precision Agriculture...........................................................................11

Bibliography..................................................................................................12

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Multi-country Analysis of Strategic IS Agribusiness

1 Industry Demographics

1.1 Total Industry SizeThe agribusiness industry plays a vital role in every nation, not only producing food and agricultural products but also employing the largest number of workers among all the industries. In recent years, the development of technology is changing the structure of agribusiness industry, resulting in fewer farms and farm workers (Bureau of Labor Statistics, 2010-2011).

Agribusiness includes over 2 million employers, as of 2008. Crop production and animal production employ over 40% of agribusiness laborers. Smaller segments of the industry include support activities, logging, fishing, and forestry, accounting for around 15% of laborers.

Distribution of total employment in agribusiness, 2008 (Source: BLS Division of Industry Employment Projections, 2008)

The number of large agribusiness firms is very small, accounting for less than 20% of employers. However, large firms and corporate farms produce around 75% of agricultural goods annually (Bureau of Labor Statistics, 2010-2011).

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In terms of international market share, United States (36.9%), Canada (12.6%) and Singapore (10.4%) are the largest participants among all the countries, together comprising about 60% of the total market, according to 2010 S&P statistics.

Global Agribusiness Country Breakdown (Source: S&P Global Agribusiness Indices, 2010)

1.2 Main Products & ServicesThe agribusiness industry encompasses a wide range of activities and disciplines regarding food production. Major functions include farming, equipment manufacturing, seed supplying, agriprocessing, packaging and distribution, marketing, and retail sales. Major products include food products such as wheat, corn, soy, livestock, eggs and diary, and non-food products including fertilizers, weed killers, growth hormones, textiles, lumber, equipment, and energy.

1.3 Top Global Companies by Market Share

Top 10 Agribusiness Companies (Source: S&P Global Agribusiness Indices, 2010)

The top company by global market share is Potash Corp of Saskatchewan. Among the other top nine by market share are five US companies, with others hailing from Brazil, Singapore, UK and Switzerland. (S&P, 2010.) These companies specialize in different 3

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products and services. For example, Potash Corp. produces fertilizers and fertilizer ingredients, while the core business of BRF and Associated British Foods is food processing and trading.

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1.4 Financial Analysis of the IndustryIn agribusiness, profitability and return on assets greatly rely on the financial performance of farms, which supply raw materials to agriprocessing companies. Financial data show that the average operating profit margin and average return on assets are negative for small-scale farms, but positive for large and corporate ones (Hoppe, Korb, O’Donoghue & Banker, 2007), indicating that bigger farms have higher levels of sales. In terms of net income, the majority of small farms generated a positive value, though low compared with large and corporate farms (Hoppe, Korb, O’Donoghue & Banker, 2007). Overall, in 2004, the average net farm income was $25,000, which was a 37% increase over 2003. Continued growth is predicted for future years.

(Source: Economic Research Service, 2007)

1.5 R&D SpendingPrior to 2000, agricultural R&D spending focused on increasing the productivity. Since the 1980s, public R&D funds in developed countries have shifted toward environmental, food quality and safety objectives. As a result, developing countries, which rely on R&D spillovers from other countries, have become more self-reliant, investing more on R&D for their own agricultural technologies. In 2000, the percentage of public agriculture

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investment in developing countries exceeded that in developed countries for the first time (Pardey, PG., Alston, JM. & Beintema, NM., 2006).

Global Public investment in agricultural R&D: 2000 (Source: Pardey, PG., Alston, JM. & Beintema, NM., 2006)

Starting in the mid-1980s, public investment inR&D research has leveled off, while private sector R&D funding is growing rapidly. Data indicates that private research expenditures have tripled between 1960 and 1996, and is still growing steadily. Because of this shift and globalization pressures, research activities have shifted toward the private sector (Economic Research Services, 2006). For most developing countries, private sector funding for R&D still barely meets the increasing demand for productivity, and leading multinational firms play an important role in continuing growth.

1.6 IT SpendingIT funding mainly supports implementation of advanced technologies and systems utilized to facilitate all stages of agribusiness (Bureau of Labor Statistics, 2010-2011). Specifically, IT funding supports the production process to develop improved dynamic prediction models (Kuhlmann, 2005) to benefit the procurement process. With telecommunications and data warehousing, companies can develop improved supply chain management, and store and transfer information for e-commerce.

1.7 Extent of GlobalizationGlobalization has resulted in a norm of multinational supply chains for the entire agribusiness industry, and significant concentration of the global food system has emerged. Large multinational corporations obtain raw materials, process products and conduct trade globally. The major agriculture products are highly concentrated among these companies, being produced, and sold by a handful of leading firms around the world. Small market

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segments also show high levels of concentration due to duopolies and monopolies (Wilkinson, 2009). Leading firms not only apply vertical integration throughout all phases within the industry, but also grow horizontally across market sectors. Vertical and horizontal integration is further enhanced by “strategic alliances” with complementary firms such as manufacturers, energy and chemical companies (Wilkinson, 2009).

2: Industry Strategic Analysis

(Porter, 2008)

We will perform a strategic industry analysis using Porter’s ‘Five Forces’ model, examining competitive rivalries, threat of substitute products or services, threats of new entrants, bargaining power of customers, and bargaining power of suppliers in the agribusiness industry. (Porter, 1979) (Porter, 2008)

2.1 Competitive Rivalry in the IndustryAgribusiness is a highly complex and globalized industry where customers, partners, competitors, and value and supply chains are intricately connected. The industry operates at a macro level, with a handful of large, dominant multinational organizations, as well as a micro level, comprised of small farmers and independent family businesses.

Products and services include livestock, crops, fertilizer production, heavy equipment manufacturing, logging, fishing, hunting, and trapping. Relationships between organizations blur, with a single company selling some products to a customer and buying others from them. Country, organization, and product are often used as measurements of success or growth. These metrics are diverse and, although useful on certain levels, i.e. to track production and sales, they do not tell the complete story of buyers, suppliers, or competitors. This adds further haze to an already unclear industry definition.

These dynamics make the nature of competition between companies ambiguous. Relationships between them can vary depending on product involved. A definition of competitors is clouded further by government regulation and intervention, as well as by the size and dominance of a few firms (Olson & Boehlje, 2010). As an object example of the diversity of agribusiness, we performed a North American Industry Classification System search for ‘agriculture.’ Our search yielded the following results:

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NAICS Code

NAICS Definition

112519 Sea plant agriculture

115115 Agriculture production or harvesting crews

333111 Harvesting machinery and equipment, agriculture, manufacturing

333111 Irrigation equipment, agriculture, manufacturing

423820 Harvesting machinery and equipment, agriculture, merchant wholesalers

541711 Biotechnology research and development laboratories or services in agriculture

541712 Agriculture research and development laboratories or services (except biotechnology research and development)

926140 Agriculture fair boards administration

926140 Pest control programs, agriculture, government

926140 Weed control, agriculture, government

(Source: North American Industry Classification System)

Large-scale rivals include Monsanto and Archer Daniels Midland. Small-scale rivals include local, family-owned farms. Mergers between multinationals have reduced the number of competitors, but done little to change industry competitiveness and have effectively squeezed out smaller, independent firms.

For example, Tyson Foods and Iowa Beef Processors, Inc. merged in 2001 to form a prepackaged meat goliath (Moeller, 2003). This increased competitiveness among rivals such as Hormel Foods and Smithfield Foods, put pressure on small meat suppliers, and created a vacuum for smaller firms and farmers. Without doubt, the greatest economic threat to farmers as independent entrepreneurs is the deadly combination of concentration and vertical integration. Producers are vulnerable to a combination of high levels of concentration in input supply and output processing and high levels of vertical integration from the top down (Harl, 2000).

Given the vast array of exploration possible on this topic, each of the following sections will include review of one or more example from different agribusiness industry segments.

2.2 Threats of New EntrantsThreats of new entrants in agribusiness come locally, domestically, and globally. Due to the extensive resources required to be a global agribusiness player, threats of new entrants on that scale are extremely limited with the exception of new entities formed from acquisitions or mergers, such as the aforementioned Tyson Foods and Iowa Beef Processors, Inc. merger.

An interesting opportunity for a new entrant may come in the form of intellectual property, specifically patent expiration. Monsanto’s ‘Roundup Ready 1’ patent on its controversial ‘RoundUp’ crops--genetically engineered and using a herbicide with the active ingredient

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glyphosate--expires in 2014 (Delano, 2009). When that patent expires, so does an annual revenue stream of approximately half a billion dollars in royalties. (Morris, 2010). Unless Monsanto can convert farmers to its latest iteration, ‘RoundUp Ready 2,’ an interesting space will be created for a manufacturer with the capability to produce a generic version of RoundUp.

2.3 Threat of Substitute Products or ServicesIn agribusiness, beef will not always be beef and corn will not always be corn. With the scientific and technological capacities available today, the genetic modification of seeds and the systematic rearing of livestock are two areas where substitute products or services can emerge.

The epidemiology of seed diseases provides opportunities for disease management through modem seed technology (McGee, 1995). Companies can now genetically modify seeds to withstand certain insects and environments as well as yield a specific amount of crop. Likewise, livestock technology presents similar opportunities. Livestock vaccination, RFID technology (Yin, Chen, Lu, Li, & Wu, 2011 ), and carcass quality (Yong, Hong-mei, Yan-yan, & Yu-jing, 2010) are but a few possibilities that broaden the playing field to competitors with appropriate technical and scientific expertise.

2.4 Bargaining Power of CustomersThe breadth of products and interconnectedness of the industry results in a wide variety among agribusiness customers. Examples include:

Food Retail--looking to buy everything from POS data to inventory management systems

Multinational Agribusiness--looking to buy logistics insights and CRM applications

Small-scale family farmer--interested in farm equipment and agricultural supplies

Consumer--choosing between organic and non-organic foods in the supermarket

The food retail value chain presents an interesting example of the bargaining power of customers. Retailers selling directly to consumers (e.g. supermarkets) have been collecting data via POS systems for over 25 years (Olson & Boehlje, 2010). This has enabled retailers to better understand customer-purchasing behavior and maximize product marketing and inventory management. This data has strengthened their bargaining power over their suppliers. The balance of power shifted from supplier advantage to retailer advantage starting in the 1980s. Much of the impact of this shift had largely occurred before 2000 (Olson & Boehlje, 2010).

Another example of the bargaining power of customers is Walmart’s investment in, and adoption of, radio frequency identification (RFID). They require all suppliers to similarly adopt the technology or they will be removed from Walmart’s supply chain (Narsing, 2005).

2.5 Bargaining Power of Suppliers

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As with the rest of the industry, agribusiness suppliers are as diverse as the industry’s customers and competitors, selling everything from commercial greenhouses to spring tine cultivators to insulation.

Small-scale milk cooperatives in Germany exhibit a good example of the bargaining power of suppliers. The cooperatives can collect and sell milk to dairy companies. These marketing cooperatives organize farmers in a certain regions and then bargain for better prices by reducing the number of alternative suppliers in a region. These organizations have a long tradition in and are supported by German law (Theuvsen, 2009).

3: Strategic Information Systems AnalysisAs an industry, agribusiness is characterized by complex supply chains.  Farmers, ranchers, and foresters purchase agricultural supplies and equipment such as seed, fertilizers, pesticides, tractors, and storage facilities from agricultural supply companies. Other companies offer services to farmers, such as water or soil quality testing, or training in sustainability practices and land management.  Farmers grow, cultivate and harvest the raw agricultural products, then sell them to processing companies which turn them into processed foods, chemicals, textiles, lumber, and other finished products.  The processing companies then send their goods to retailers.  These supply chains frequently stretch across international borders, as agricultural supply companies ship their goods worldwide, and processing companies stationed in one country buy crops from farmers in multiple other countries where the crop is grown. (Folkerts and Koehorst 1998.)  For example, a textile producer might source wool from Scotland, Italy, and Australia.

As such, supply chain management becomes a central strategic issue which crosses over into areas of communications and customer relationship management.

3.1 Supply Chain ManagementAgribusiness supply chain structures war with each other.  Large companies compete for efficiencies, using technologies such as RFID (Narsing 2005) and customer relationship initiatives to cultivate close buyer/supplier relationships, and training programs to increase product quality. (Bemis 2010.)  Large agribusiness firms which interact with large numbers of small suppliers must also bear significant administrative and transaction costs associated with communications, account and inventory management, and data tracking, making robust supply chain management systems a priority.  (Choudhary and Sen 2011)

Small agribusinesses and agricultural regions gain competitive advantage through undercutting the larger, more complex supply chains of their international competitors. While they can leverage powerful market forces, large supply chains isolate farmers from retailers and consumers. (OKeeffe 1998.)  With the growing market for ‘natural foods’ and sustainable produce, small farmers and regional companies are taking advantage of that weakness by building shorter supply chains that minimize this separation.  Consumers find the transparency of these supply chains and the accessibility of the farms and businesses involved appealing.  (Marsden and Bristow 200.)

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Social media and converging communications are another source of strategic advantage--and upheaval--in supply chain management.  Jean Kinsey (2000) identifies information and communications technology--notably the internet--as one of the two biggest technological influences on supply chain structure.

ICT applications can now take the place of some functions historically performed by complex supply chain management systems, enabling agribusinesses to cheaply and efficiently collect and aggregate data from buyers and suppliers, and more easily manage communications. (Choudhary and Sen 201.)

ICT is also driving significant changes at the level of the farmers and other small agribusinesses.  Small agribusinesses were historically at the mercy of the large intermediary firms.  With crops expensive to transport and unable to be stored indefinitely, farmers in particular faced restraints, typically having to choose from among their most immediate options.  Internet and mobile communications now provide the ability to track market prices even to farmers in developing countries.  They can also reach potential buyers without having to travel, enabling them to sell their products at more competitive rates.  (Choudhary and Sen 2011)

3.3 Customer Relationship ManagementDue to the increasing independence of small farmers/suppliers, agriprocessing companies are competing for the best suppliers and product by developing initiatives to cultivate closer relationships with farmers.  Online account management provides farmers and other business partners with easy access and management of their finances and inventories, enabling a smoother and more efficient relationship. (Arthur-Daniels-Midland 2012)  Some companies are also launching initiatives to train farmers in agricultural techniques and technologies, enabling them to grow better crops more efficiently.  The buyer company benefits from a better end product, and farmer benefits from larger, more valuable crops, thus increasing the farmer’s loyalty to the buyer company (Bemis 2010)

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3.4 Precision AgriculturePrecision agriculture is an agricultural technique that improves yields and reduces costs through extremely tight management of time and resources (Smith, 1997). The goal of precision farming is to increase income while reducing environmental impact. The approach benefits from technologies including Geographic Information Systems, remote sensing systems, and Global Positioning Systems (Zhang, Wang M. & Wang N, 2002). These technologies can provide data with a high degree of accuracy, yet are widely available and easy to install and use (Smith, 1997).                           These tools have enabled small farms to optimize their strategy and mitigate risks. Large companies also use them to improve tracking of activities and productivity of their cooperating farms, monitoring elements such as real-time progress of crops, collecting seed information and monitoring weather conditions. This data can be used by managers to improve predictions and plans (The World Bank, 2011).

Precision agriculture is not yet being applied widely since the technique’s economic and environmental benefits are still questioned by some sectors of the industry. Despite the range of technologies available, many farmers remain uncertain whether to adopt them, considering the high cost for an unknown return (Zhang, Wang M. & Wang N, 2002).

Precision agriculture is most popular in the US, where over 5,000 farms have adopted GPS technology to help them monitor their activities.  In Australia, another high-technology agricultural economy, less than 200 farms have adopted the technology.  In most countries, the implementation of precision agriculture has been utilized mainly for spatially variable applications, For example, farmers may attach the GPS functionality to the tractors to better identify the boundaries of the fields and optimize the portioning of their fields for growing different kinds of crops (Bureau of Labor Statistics, 2010-2011).

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