Most Americans don't think much about food - except every few hours when it's time to eat.

And eat well we do.We eat without being concerned where the food comes from. We may eat a hamburger:

(1)-- Prepared in a local assembly plant that uses buns baked in America (but contains wheat that could be grown and milled into flour in another part of the world). (2)-- The beef could be from another country (as far away as Australia), although processed into burger form in America.

(3) --And, the lettuce and tomato could be from Mexico (although sliced by the local restaurant staff).

As the only contact with food for most folks is when they sit down to eat, we seldom notice changes in the food industry as they gradually occur. The change most visible is the range of available products which has expanded over time. We saw 15,000 new grocery items go on the shelf in 1998 -- compared with 2,000 in 1980.

We're paid for what we know -- not what we do as we move up the "food chain" as our country develops. Capital and management are the main facets of today's agriculture. Farming in the U.S. has gotten so far advanced that we have freed most of the farm population to work in other industries.

...a farmer at a local Experiment Station field day commented "If things don't get better in farming, not many of us will be in business five years from now".

Two of those five years have passed. Beef prices are higher - causing prices for our feeder cattle to be high enough to let us make a little profit. The materials I read by the beef specialists tell us cattle producers are just beginning to hold back heifers to expand their operations. But as we are 2-3 years away from more beef going onto the market, it looks as if beef prices may stay at a profitable level for a short while.

But most of those growing traditional row crops are having cash flow problems. The 1996 farm bill was passed during a time of federal budget deficits and congress was looking for places to trim the budget. The logic of "get the government out of the business of supporting agriculture" prevailed - and Freedom-to-Farm was passed. It removed all set aside provisions and support prices for basic commodities. It did provide for some "transition payments" to be paid to farmers during a transition period of 1996 through 2002. After this time, we were to have a totally free-market farm economy.

But someone forget to tell us how the free market reacts for farm commodities that have a supply/demand relationship of "a shortage is priceless and a surplus is worthless".

World supplies of most basic commodities are at a level that has pushed the market price below production costs. Many other countries provide levels of price support. This has forced congress to appropriate additional monies the past three years to help keep many U.S. farmers in business.

When Freedom-to-Farm was passed in 1996, basic commodity prices were at a level that created profit and reduced federal farm outlays to around $5 billion annually. These outlays have increased since 1996 and in fiscal year 2000 we saw $32 billion paid to our farmers - a record amount. While the majority of these funds were in the forms of market transition payments - other measures came into effect, primarily loan deficiency payments and conservation reserve payments. Additional funds were authorized in the forms of market loss payments and disaster payments - which included pasture and hay losses.

During this time of depressed farm income we are seeing a growing concentration in both the processing market of farm commodities and in the farm input market. Those advocating a greater market orientation in Freedom-to-Farm did not consider the workability of markets in which farmers would be selling their products. The current market structure creates a power differential between farmers, and processors who have more information and financial leverage.

We are told that the four largest meat packing firms currently control over 75% of the market - up from 36% in 1980. And increased contract usage is taking place. Contracts now account for 35% of all farm production - 1/4 of the cattle and over ½ the hogs acquired by packers, and about all of the broilers.

The justification of contracts begins with the consumer who wants the same quality product each time a purchase is made. And the processor is in business to make money. Contracts, or even vertical integration, lets the processor better control the quality and quantity of raw farm product. These consumer demands are forcing continued changes, and producers apparently will have to decide whether they should fight to abolish the system or try to capture part of the benefits.

And the "getting larger" concept prompts farmers to get larger as it gives them more volume of output to provide some bit of bargaining power with these processors. Further, this volume lets them make up some of the loss that occurs from time to time with reduced profit per unit of production.

On the input side we find that three fertilizer companies are reported to control 50% of the market - down from ten companies sharing this percentage of the market in 1980. The marketing concentration of the four largest firms in agribusiness in 1998 is shown on the next page. Compare these with the average market control by the four top firms on all manufacturing industries in the U.S., which is close to 40% of the market.

And the concept of mergers seems to be occurring in most industries. Witness the recent mergers in the communications and the airlines industries - plus speculation there may be more airline mergers.

While we look at bigness with suspicion - keep in mind that bigness gives market power. How many of us shop at Wal Mart, the country's biggest retailer because it is price competitive, or the nations 2^nd and 3^rd biggest retailers, K-Mart and Sears, respectively.
 

Major Concentration of The Four Largest Firms of Agribusiness (in 1998)
	Market Concentration (%)
Grain & Oilseed Processing
Flour Milling	62%
Soybean Milling	83%
Cottonseed Milling	62%
Malting	65%
Biotechnology & Seed Processing
Corn	69%
Soybeans	47% +
Wheat	36%
Cotton	87% ++
Meat Packing
Hogs	54%
Steers & Heifers	78%

Source: James McDonald, ERS-USDA

+ An estimated 25% of soybean seed are farmer saved.
++ One company in this market.

Speaking of bigness, of the 11% of our national disposable income we spend on food each year, 50% is eaten at home and 50% eaten away from home. Four firms control 50% of the restaurant sales. They are McDonalds, Pepsico (Incl. KFC and Pizza Hut), Burger King and Wendys. No doubt these firms all either grow or contract a large percentage of the food items they serve.

One definition that bears a look is the idea that "the U.S. is in the process of turning making things over to the third world". After all, isn't about three-fourths of our economy today associated with service? How long will it be before the transition is complete?

Given the land resource we have for food and fiber production, I can't see all these resources not being used. But the transition in the food and fiber industry is real. Taking it a step further, I recall one of our recent presidential candidates, when asked about low crop commodity prices and the farm financial problems, responded with something like "I can visualize the U.S. importing a high percentage of its' food within 15 - 20 years". Really?

We are told about 2/3 of the world's food supply is embedded in three grains - corn, wheat and rice. Corn is the major feed for all animal production, and about 40% of our grocery bill is for meat. Wheat is the major source of bread, and we surely eat bread every day. We don't eat a lot of rice, but it is a major staple in a lot of countries. I guess this explains why so much of our farm programs are orientated toward grains.

U.S. farmers can grow a lot of grain, and efficiently, but countries that once were our customers for these raw farm products are now trying to become self sufficient. Not only do they buy less now from us, but they export any extra they may have to gain some foreign exchange so they can buy other items. They are our competition rather than our customers.
 

Family farms, then, are faced with three opportunities for production - to stay in business. They are:

1 - Low cost, large scale commodity production.

2 - Medium or small scale commercial production combined with non-farm sources of income.

3 - Production and marketing of specialized products.

A high percentage of farmers today (in Georgia and the U.S.) fit into the second category. They farm because they like the occupation - or maybe they own the land either by inheritance or purchase - and farm as a means of relaxation and/or recreation. Given this situation, it comes as no surprise that the 1997 Agricultural census reported that over 80% of the income to farmers is from non-farm sources.

The third opportunity for farmers - producing specialized products - provides a means for filling niche markets. This can be highly profitable - but extremely risky. It takes a lot of planning - and a lot of luck to succeed.

And within all of this maze we have still more regulations - items such as environmental restrictions (waste disposal, non-point source pollution, nuisance problems and zoning regulations). Then let's don't forget water regulation, which may affect large scale operations the most. And, there are animal rights groups, which can affect legislation.

Outside the farm we are seeing changes in food consumption habits, concerns about food safety, and health and nutrition concerns. We get the feeling that people want food as long as its' production doesn't offend them.

Risk in farming is greater than most realize. Farm production takes time - and a lot can happen to the markets between the time production begins and ends. If a disaster strikes and production is reduced - the farmer has less to sell. If he overproduces, the market price falls - and he receives a lower price and less income.

So the idea of "live cash poor - but die rich"can well apply to farmers. But cash shortfalls has been common in farming for generations. Fortunately, Congress has (and still does) partially come to the rescue. And fortunately, urban encroachment provides the farmer a source of retirement income with increased land values.

Just over of 500 acres per day - That's the number of FARM ACRES GEORGIA HAS LOST DAILY between 1969 and 1997. Farmland acreage dropped over this period from 42% of the state's land mass to 29% of the total. Apparently a lot of folks who formerly farmed decided they could get a higher return from their investment in monetary form rather than land form.

Steven Blank, of the University of California, contends the U.S. is fast on the way to implementing the new economy. His argument is that world trade will keep food (and farm prices) at the level of the country with the least cost of production - whether it be the U.S. or some country with low labor rates.

We don't entirely agree with this, although we must admit the process appears to be in place for moving forward.

But the unexpected can happen, (and often does).

The foot-and-mouth and mad-cow disease outbreaks may slow this process. The American public has not widely expressed concern, but both our federal and state governments have begun efforts to try to keep the problems out of the U.S.

We can expect a ban or higher restrictions on more products from Europe - everything from mozzarella cheese to farm tractors and rotary tillers. Also, expect increased inspection of all types of non-farm equipment from there.

Domestic dairy and beef producers are fearful about FMD spreading here, and state governments are putting in place tougher restrictions than those imposed by USDA.

Further, the FDA will keep close tabs on feed mills over the next few years as some are apparently breaking mad cow prevention rules which prohibit feeding mammalian meat and bone meal to cattle and sheep.

Finally, pressure from fast-food places will help boost compliance. Before long they will probably be demanding written guarantees from meat and dairy suppliers, providing proof that animals were fed according to rules set by the FDA. We understand McDonald's, for example, established such a policy as of April 1, 2001.

This thinking will spur the livestock industry into action - affecting packers, slaughter plants, buyers, dealers, auction markets, etc. They'll be asking producers to sign a document showing that the animals weren't fed banned material.

One slip here and we could well face a ground swell of public opinion regarding food imports. It might not last long, but again, who knows. The idea that the cheapest source of food is the best source may not always be with us.

I wish we could leave with you a more definite path that farming will follow - in the short-run and the long-run. We economists are accused of talking about trends and changes, without offering solutions to the immediate problems. We are further accused of using these topics to try to divert attention from the problem.

The intent here has been to try to explain why our problems have occurred. Looking back at political and economic forces help to define the "why" of an occurrence. If these off-farm forces don't change, then a continuation of these changes is likely to occur.

But it is hard to believe our leaders (political and economic) will be content to totally depend on an off-shore food supply - regardless of the profit bottom line. It is the guess here, that given the consumer's increased awareness of health and food safety - plus their demands for a consistent food supply and quality - that we will see more and more vertical integration and contracting.

Regardless of what we think about this - keep in mind that the vertical integrators and contractors are aware of the per unit cost of producing raw commodities. We don't believe they will push these commodity prices down to below costs - regardless of how it appears on the outside. Maybe this is an appropriate time to search for some type legislation to include farmers as partners in the vertical integration structure - so they will benefits from higher profits but have to accept a loss when the corporation incurs a loss. We need more thought on this one!

Bill Givan, UGA Extension Economist
Remarks made at Beef Cattle Field Day, Blairsville, Georgia, April 18, 2001

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