The U.S. Food and Fiber Industry
Chapter 2
CHAPTER 2: TOPICS OF DISCUSSION
Indices and nominal versus real values
What is the food and fiber Industry?
Changing complexion of production agriculture
Physical structureProductivityProfitabilityFinancial structure
Sectors within the Food and Fiber Industry Farm input suppliersFood processors, wholesalers and retailersValue added process
THE FOOD AND FIBER INDUSTRY. . .
Consists of those business entities that are involved in
one fashion or another with the supply of food and fiber to consumers.
FOOD & FIBER INDUSTRY(1) FARM INPUT SUPPLY SECTOR
(e.g., John Deere, Ralston-Purina)
(2) FARM SECTOR
(3) PROCESSING & MANUFACTURING SECTOR (e.g., Tyson Foods, Del Monte, Swift)
(4) WHOLESALE & RETAIL SECTOR (e.g., Sysco, Kroger, HEB)
(5) CONSUMER (us)
1 out of every 6 jobs is tied to the food and fiber industry
Responsible for roughly 12 to 15 percent of GDP
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
85.9 78.7 58.5 70.3 86.6 62.2 79.0 94.7 113.8 120.6
Net Farm Income ($ billion)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
124.5 114.4 118.9 151.1 185.1 169.1 171.1 202.2 223.5 211.1
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
124.4 126.5 119.4 138.4 140.3 119.2 140.6 145.5 150.5 159.1
Value of Crop Production ($ billion)
Value of Livestock Production ($ billion)
Source: Economics Research Service, USDA (www.ers.usda.gov)
forecast
forecast
forecast
Some Key Measurement Topics
Output and Price Indices
Nominal and Real Expenditures
Indices
Index – a percentage comparison from a fixed point of reference or benchmark.
with an index, economists can more easily describe how much, say wheat output for example, has increased or decreased relative to the benchmark or base period.
CPI Consumer Price Index
WPI Wholesale Price Index
Index of prices received or paid by producers
Pages 14-15
Output and Price IndicesApple Production Price of apples
Year (1000 short tons) Output Index ($/pound) Price index
1985 3,957 0.819 $0.685 0.952
1990 4,828 1.000 $0.719 1.000
1997 5,162 1.069 $0.907 1.261
1990 is the base year
1990 is the base year
Page 14
Apple Production Price of apples
Year (1000 short tons) Output Index ($/pound) Price index
1985 3,957 0.819 $0.685 0.952
1990 4,828 1.000 $0.719 1.000
1997 5,162 1.069 $0.907 1.261
Output and Price Indices
1990 is the base year
1990 is the base year
1.069 = 5,162÷4,828Output 6.9% higher in1997 than it was in1990….
1.069 = 5,162÷4,828Output 6.9% higher in1997 than it was in1990….
Page 14
Apple Production Price of apples
Year (1000 short tons) Output Index ($/pound) Price index
1985 3,957 0.819 $0.685 0.952
1990 4,828 1.000 $0.719 1.000
1997 5,162 1.069 $0.907 1.261
Output and Price Indices
1990 is the base year
1990 is the base year
1.06 = 5,823÷5,512Output 6% higher in1997 than it was in1990….
1.06 = 5,823÷5,512Output 6% higher in1997 than it was in1990….
1.261 = 0.907÷0.719 Price 26.1% higher in 1997 that it was in 1990….
1.261 = 0.907÷0.719 Price 26.1% higher in 1997 that it was in 1990….
Page 14
1.069 = 5,162÷4,828Output 6.9% higher in1997 than it was in1990….
1.069 = 5,162÷4,828Output 6.9% higher in1997 than it was in1990….
http://www.nass.usda.gov/Charts_and_Maps/Agricultural_Prices/
http://www.nass.usda.gov/Charts_and_Maps/Agricultural_Prices/
http://www.nass.usda.gov/Charts_and_Maps/Agricultural_Prices/
Output and Price Indices for Milk, 1995 to 2012
Milk Production (million pounds)
Output Index (Base Year 2000)
All Milk Price ($/cwt)
Price Index (Base Year 2000)
1995 155,292 0.93 12.74 1.031996 154,006 0.92 14.88 1.211997 156,091 0.93 13.34 1.081998 157,262 0.94 15.50 1.261999 162,589 0.97 14.36 1.172000 167,393 1.00 12.32 1.002001 165,332 0.99 14.97 1.222002 170,063 1.02 12.11 0.982003 170,394 1.02 12.52 1.022004 170,934 1.02 16.05 1.302005 176,929 1.06 15.13 1.232006 181,782 1.09 12.88 1.052007 185,654 1.11 19.13 1.552008 189,992 1.14 18.33 1.492009 189,334 1.13 12.83 1.042010 192,848 1.15 16.26 1.322011 196,245 1.17 20.14 1.632012 200,366 1.20 18.51 1.50
Nominal and Real Expendituresfor Food Eaten Away From Home
Nominal Expenditures CPI Real Expenditures
Year (billion dollars) 1982-84=1.00 (billion dollars)
1980 120.296 0.824 145.990
1985 168.831 1.076 156.906
1990 248.464 1.307 190.102
1995 302.419 1.569 198.437
1982-84 average is the base year for the CPI
1982-84 average is the base year for the CPI
Page 15
Nominal Expenditures CPI Real Expenditures
Year (billion dollars) 1982-84=1.00 (billion dollars)
1980 120.296 0.824 145.990
1985 168.831 1.076 156.906
1990 248.464 1.307 190.102
1995 302.419 1.569 198.437
1982-84 average is the base year for the CPI
1982-84 average is the base year for the CPI
CPI was 56.9% higher in 1995 than it was in1982-84 period
CPI was 56.9% higher in 1995 than it was in1982-84 period
Page 15
Nominal and Real Expendituresfor Food Eaten Away From Home
Nominal Expenditures CPI Real Expenditures
Year (billion dollars) 1982-84=1.00 (billion dollars)
1980 120.296 0.824 145.990
1985 168.831 1.076 156.906
1990 248.464 1.307 190.102
1995 302.419 1.569 198.437
1982-84 average is the base year for the CPI
1982-84 average is the base year for the CPI
CPI was 56.9% higher in 1995 than it was in1982-84 period
CPI was 56.9% higher in 1995 than it was in1982-84 period
198.437 = 302.419÷1.569 The increasing CPI eroded the purchasing power of the dollar….
198.437 = 302.419÷1.569 The increasing CPI eroded the purchasing power of the dollar….
Page 15
Nominal and Real Expendituresfor Food Eaten Away From Home
Characteristics of the Food and Fiber
System
The Nation’s food and fiber system consists of various sectors that providefood and fiber products to their ultimate consumer. Page 16
Changing Complexion of Farming
Physical structureFewer number of farms but larger-sized farmsIncreasing use of capital relative to laborIncreasing productivity or output per unit of input
Financial structure and performanceNominal net farm income growth in recent timesDeclining debt use strengthens equity positionRecovering real estate values after sharp declines
during the financial crises in the mid-1980s
Pages 17-26
Important Facts
• Number of farms roughly 2.2 million at present• Peak 1935—6.8 million farms• Average size of the US farm between 400 and 500
acres today• Since WWII, average farm size has doubled
Fig. 2.2A Trends in the number of farms, 1990 to 2010
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2,020,000
2,040,000
2,060,000
2,080,000
2,100,000
2,120,000
2,140,000
2,160,000
2,180,000
2,200,000
2,220,000
Year
Num
ber
of F
arm
s
Fig. 2.2B Trends in the average size of farms, 1990 to 2010
390
400
410
420
430
440
450
460
470
Year
Ave
rage
Siz
e of
Far
m
Specialization, Diversification, Organization, and Contracting
• Share of the 50,000 largest farms (2%) account for roughly 50% of total sales
• 56% of US farms have sales < $10,000
• Concentration of production may be more of a critical issue than the decline in the number of farms; 10% of U.S. farms account for 75% of value of production
• The number of farms has been holding steady between 2.1million and 2.2 million for the past 20 years
Specialization, Diversification, Organization, and Contracting
• US farms tend to be specialized rather than diversified
• About half of US farms produce one commodity
• ¾ of farms with sales > $0.5 million produce no more than three commodities
• 60 percent of all farms are comprised of retired operators and operators who also work off the farm
• Average age of farm operator is in the mid 50s today, 48 in 1940
Specialization, Diversification, Organization, and Contracting
• Corporate farms versus family farms
• Family-owned farms are NOT losing their share of US agriculture to non-farm corporations
• US farms are most organized as individual operations; farms organized as partnerships are about 5 percent of US farms; farms organized as corporations are roughly 3 percent of US farms
• But partnerships and corporations account for roughly 40 percent of the value of production
Specialization, Diversification, Organization, and Contracting
• Over the past 40 years, farmers have become LESS dependent on terminal markets and spot pricing
• Roughly 10 percent of farms today rely on production and marketing contracts, and these farms account for 52 percent of agricultural production
• 90 percent of US farms today have no production and marketing contracts
A Note on Farm Inputs
• Land, Labor, Capital, Materials• Capital refers to durable equipment and structures• Labor—Hired and Self-Employed• Materials—Energy, chemicals, and purchased
services
A Note on Farm Inputs
• Total farm input, in the aggregate, has remained relatively stable since WWII
• Labor on the decline, materials on the rise• Capital substituted for labor; use of capital inputs
peaked around 1980 and then declined from 1981 to 1995; since 1996 capital has leveled off
Fig. 2.3 A Index of total farm inputs used in agricultural production, 1948 to 2008 (1996=1.00)
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
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1991
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1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
0.90
0.95
1.00
1.05
1.10
1.15
1.20
Year
Ind
ices
Fig. 2.3B Index of capital, labor, and materials used in agricultural production, 1948 to 2008 (1996=1.00)
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
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1989
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1991
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1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
capital labor materialsYear
Ind
ices
A Note on Productivity• Productivity defined as output per unit of input
• Productivity has increased dramatically since WWII
• Output has been on the rise due primarily to development and use of technology and biotechnology (e.g. BST)
• Growth rates in livestock and crop output have been about the same; average growth rate is 2 percent per year
A Note on Productivity
• US farmers have adopted widely genetically-engineered (GE) crops since their introduction in 1996
• Examples—soybeans and cotton genetically-engineered with herbicide-tolerant traits; cotton and corn with insect-resistant traits
Figure 2.4. Index of agricultural productivity, 1948 to 2008 (1996=1.00)
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
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1997
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2004
2005
2006
2007
2008
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
Year
Ind
ices
Figure 2.5 A Index of total output from the farm sector, 1948 to 2008 (1996=1.00)
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
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1997
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2004
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2006
2007
2008
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
Year
Ind
ices
Figure 2.5 B Index of output associated with livestock products, 1948 to 2008 (1996=1.00)
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
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2004
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2007
2008
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
Year
Ind
ices
Figure 2.5 C Index of output associated with crops, 1948 to 2008 (1996=1.00)
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
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1997
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2004
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2006
2007
2008
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
Year
Ind
ices
Farm Profitability Cash receipts from farm marketings
+ Government payments
+ Other income from farm sources
= Gross farm income
– Production expenses
= Nominal net farm income
÷ Broadly-based price deflator
= Real net farm income
Pages 23-24
Figure 2.6 A Gross farm income and production expenses, 1949 to 2010
19491952
19551958
19611964
19671970
19731976
19791982
19851988
19911994
19972000
20032006
20090.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
gross farm income production expensesYear
Bill
ion
$
Figure 2.6 B Nominal and Real Net Farm Income, 1949 to 2010
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
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2003
2004
2005
2006
2007
2008
2009
2010
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
nominal net farm income real net farm income
Year
Bill
ion
$
Financial Structure Value of real estate assets
+ Value of non-real estate assets
+ Value of financial assets
= Total assets
– Total liabilities or debt
= Equity or net worth
Pages 25-26
Figure 2.7 A Real Estate Assets and Non-real Estate Assets 1960 to 2010
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
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2007
2008
2009
2010
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Real Estate Assets Non-Real Estate Assets
Year
Nom
inal
Bill
ion
s of
dol
lars
$
Figure 2.7 B Farm assets and farm liabilities, 1960 to 2010
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
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2010
0
500
1,000
1,500
2,000
2,500
farm assets farm liabilities
Year
Nom
inal
Bill
ion
s of
dol
lars
$
Figure 2.7 C Equity associated with the farm sector, 1960 to 2010
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
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2004
2005
2006
2007
2008
2009
2010
0200400600800
1,0001,2001,4001,6001,8002,000
Year
Bil
lion
$
Figure 2.7 D Debt-to-asset ratio associated with the farm sector, 1960 to 2010
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
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2004
2005
2006
2007
2008
2009
2010
10
12
14
16
18
20
22
24
Year
Per
cen
t %
Figure 2.7 E Debt-to-equity ratio associated with the farm sector, 1960 to 2010
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
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1989
1990
1991
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1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
1012141618202224262830
Year
Per
cen
t %
A Note on Profitability
• Nominal net farm income was about $79 billion in 2010; over the period 2004 to 2010, range $58.5 billion (2006) to 85.8 billion (2004); forecast of $94.7 billion in 2011
• Since the 1930s, the worst year in terms of lowest real net farm income was 1983
• In 2010, farm assets were roughly $2.1 trillion; farm liabilities were on the order of $240 billion; thus equity in the farm sector was $1.9 trillion, largely due to real estate assets.
A Note on Profitability
• Debt-to-asset ratio peaked at 22 percent in 1985; currently this ratio is about 11 percent
• Debt-to-equity ratio peaked at 28 percent in 1985; currently this ratio is about 13 percent
Relative Importance of Farm Input ExpendituresRelative Importance of Farm Input Expenditures
Page 27
Beyond the Farm Gate
TABLE 2.4 Value Added for a Loaf of Bread
Page 30
Figure 2.9 Share of the food dollar for food eaten at home and for food eaten away from home.
91 89 8783
8076
74
6761
52 52 52 52 51 51 51 51
9 11 1317
2024
26
3339
48 48 48 48 49 49 49 49
0
10
20
30
40
50
60
70
80
90
100
1900 1910 1920 1930 1940 1950 1960 1970 1980 2000 2001 2002 2003 2004 2005 2006 2007
Food at home
Food away from home
Per
cen
t %
Year
Source: USDA Economic Research Service
Figure 2.10 Percentage of disposable personal income spent on food, 1935 to 2011
Per
cen
t %
Year
10
12
14
16
18
20
22
24
26
35 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10
SHARETOTFOOD
Question: Why do we see the spike and why do we see the decline??
Figure 2.14 The marketing bill share and the farm value share of consumer food expenditures, 1950 to 2006
10
20
30
40
50
60
70
80
90
50 55 60 65 70 75 80 85 90 95 00 05
Farm Value ShareMarketing Bill Share
Per
cen
t %
Year
Only 20 cents of each dollar spent on food products goesto farmers and ranchers…
Page 32
What a Dollar Spent for Food Typically Pays for
Assignment
• Please do ALL problems in Chapter 2 • (see pg 36-37).