Agribusiness Management 4th Edition PDF

Agribusiness Management Today’s food and agribusiness managers operate in a rapidly changing, highly volatile, international, high technology, consumer-focused world. This new edition of Agribusiness Management was written to help prepare students and managers for a successful career in this new world of food and ﬁber production and marketing. Agribusiness Management uses four speciﬁc approaches to help readers develop and enhance their capabilities as agribusiness managers. First, this edition of the book offers a contemporary focus that reﬂects the issues that agribusiness managers face both today and are likely to face tomorrow. Speciﬁcally, food sector ﬁrms and larger agribusiness ﬁrms receive more attention in this edition, reﬂecting their increasing importance as employers of food and agribusiness program graduates. Second, the book presents conceptual material in a pragmatic way with illustrations and examples that will help the reader understand how a speciﬁc concept works in practice. Third, the book has a decision-making emphasis, providing contemporary tools that readers will ﬁnd useful when making decisions in the contemporary business environment. Finally, Agribusiness Management offers a pertinent set of discussion questions and case studies that will allow the reader to apply the material covered in real-world situations. The bottom-line on this fourth edition of Agribusiness Management: this book is contem- porary, solid on the fundamentals, practical and applicable. It provides students and adult learners with an essential understanding of what it takes to be a successful agribusiness manager in today’s rapidly evolving, highly unpredictable marketplace. Freddie Barnard is Professor in the Department of Agricultural Economics at Purdue University, USA. Jay Akridge is Glenn W. Sample Dean of Agriculture at Purdue University, USA. Frank Dooley is Professor in the Department of Agricultural Economics at Purdue University, USA. John Foltz is Associate Dean and Director of Academic Programs for the College of Agricultural and Life Sciences at the University of Idaho, USA. Routledge Textbooks in Environmental and Agricultural Economics 1. The Economics of Agricultural Development Second edition George W. Norton, Jeffrey Alwang and William A. Masters 2. Agricultural Marketing James Vercammen 3. Forestry Economics John E. Wagner 4. Agribusiness Management Fourth edition Freddie Barnard, Jay Akridge, Frank Dooley and John Foltz Agribusiness Management Fourth edition Freddie Barnard, Jay Akridge, Frank Dooley and John Foltz First published 2012 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2012 Freddie Barnard, Jay Akridge, Frank Dooley and John Foltz The right of Freddie Barnard, Jay Akridge, Frank Dooley and John Foltz to be identiﬁed as authors of this work has been asserted by them in accordance with the Copyright, Designs and Patent Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identiﬁcation and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Agribusiness management / Freddie Barnard…[et al.]. – 4th ed. p. cm. 1. Agricultural industries – Management. I. Barnard, Freddie L. HD9000.5.A339 2012 630.68 – dc23 2011038607 ISBN: 978-0-415-59695-4 (hbk) ISBN: 978-0-415-59696-1 (pbk) ISBN: 978-0-203-12418-5 (ebk) Typeset in Times New Roman by Cenveo Publisher Services Contents List of plates vii List of ﬁgures ix List of tables xi About the authors xiii Preface xv Acknowledgments xix PART I Agribusiness management: scope, functions, and tasks 1 1 The business of agribusiness 3 2 Managing the agribusiness 36 3 Economics for agribusiness managers 59 PART II Agribusiness management: organization and context 75 4 The organization of an agribusiness 77 5 International agribusiness 99 PART III Marketing management for agribusiness 121 6 Strategic market planning 123 7 The marketing mix 143 8 Tools for marketing decisions in agribusiness 178 vi Contents PART IV Financial management for agribusiness 195 9 Understanding ﬁnancial statements 197 10 Analyzing ﬁnancial statements 224 11 Financing the agribusiness 249 12 Tools for evaluating operating decisions 274 13 Tools for evaluating capital investment decisions 298 PART V Operations management for agribusiness 321 14 Production planning and management 323 15 Supply chain management for agribusiness 346 PART VI Human resource management for agribusiness 367 16 Managing organizational structure 369 17 Managing human resources in agribusiness 395 Glossary 417 Index 446 List of plates Part I Retail food shot 2 1.1 Traditional agriculture 11 1.2 Man shopping 16 1.3 Input application 31 2.1 Man and woman planning 41 2.2 Man pouring crop protection products 52 2.3 Cherries 57 3.1 Landscaping 61 3.2 Saleslady 63 Part II Apples on display 76 4.1 Presentation to a group 83 4.2 Woman at computer 87 4.3 Fragrant Floral 90 5.1 Lettuce harvest 101 5.2 Grain harvest equipment 108 5.3 Woman riding planter 109 Part III Windmills 122 6.1 A customer interview 129 6.2 Dairy cows 135 7.1 Marketing mix 145 7.2 New product development 151 7.3 Personal selling 166 8.1 Livestock production 184 8.2 Focus group discussion 190 Part IV Shot of money 196 9.1 Recordkeeping using a computer 199 9.2 Farm land and farmstead 208 9.3 Grain elevator 217 10.1 Tools 225 10.2 Grocery inventory 239 10.3 Nursery 246 11.1 Dairy barn expansion 259 11.2 Harvesting equipment 269 12.1 Ripple rings of water 275 12.2 Nursery 279 12.3 Grain elevator 285 viii Plates 13.1 Irrigation equipment 299 13.2 Extended hands 309 13.3 Applicator 311 Part V Production process 322 14.1 Fresh produce 328 14.2 Strawberries 330 15.1 Two men inspecting a watermelon 357 15.2 Grain loaded onto a ship 361 Part VI Man working in a lab 368 16.1 Hands 377 16.2 Producer and consultant 390 17.1 Man training employees 406 17.2 Man and son in a hog barn 410 17.3 Man and young man using equipment 412 List of ﬁgures 1.1 Farm value and the marketing bill for consumer food expenditures, 1993–2009 12 1.2 2008 farm-food marketing bill 13 1.3 Industry sector value-added for the 2008 food marketing bill 13 1.4 Factor payments for the 2008 food marketing bill 14 1.5 The food production and marketing system 15 1.6 Food sales by retail sector, 1986–2009 17 1.7 Number of food stores, by category, 1997–2008 18 1.8 Sales of food at home and away from home, 1990–2009 20 1.9 Percentage of sales of food-at-home and away-from-home, 1960–2020 20 1.10 Composition of total value-added by food processors, 2007 23 1.11 Distribution of farms by sales class, 2007 27 2.1 The wheel of management 40 2.2 Levels of planning and goals for seed company 47 2.3 Organizational chart for Carlson seed company 48 2.4 Management by exception graph for Phoenix fertilizer 54 3.1 Supply and demand of cereal 66 3.2 Shortages and surpluses with supply and demand 66 3.3 Shifts in supply curves 68 3.4 Shifts in demand curves 69 3.5 Demand for bluegrass seed 71 5.1 World population distribution by region, 1800–2050 104 5.2 World population growth 105 5.3 Countries of the world by Gini coefficient 105 6.1 The market planning process 127 6.2 SWOT analysis 128 6.3 Mass market strategy 132 6.4 Market segmentation strategy 133 7.1 The marketing mix 144 7.2 The value equation 146 7.3 The total product concept 147 7.4 Categories of new technology adopters 149 7.5 The product life cycle 151 7.6 Upper and lower limits on pricing decisions 153 7.7 The promotion strategy process 159 7.8 Major agribusiness distribution channels 171 x Figures 8.1 Marketing audit procedures 179 8.2 Gap analysis 181 8.3 Sales forecasting model 182 8.4 Market map 191 10.1 Profitability analysis model for Brookstone Feed and Grain company 243 10.2 Graph of key ratios for Brookstone Feed and Grain company 245 12.1 Total fixed costs, LCM Nursery, Inc. 280 12.2 Average fixed costs, LCM Nursery, Inc. 280 12.3 Total variable costs, LCM Nursery, Inc. 281 12.4 Average variable costs, LCM Nursery, Inc. 281 12.5 Total variable costs with supplier discounts, LCM Nursery, Inc. 283 12.6 Changes in total fixed cost, LCM Nursery, Inc. 283 12.7 Volume–cost relationships for Brookstone Feed and Grain company 295 14.1 Operations management system 325 14.2 Process layout—farm implement manufacturing facility 338 14.3 Product layout—fluid milk facility 338 14.4 Hybrid layout—supermarket 339 14.5 Fixed position layout—farm building 340 15.1 Supply chain management process 349 15.2 Simplified master production schedule process 351 15.3 Periodic review inventory system 358 15.4 Continuous review inventory system 358 15.5 Changes in procurement with shift to supply chain management 364 16.1 Line organization 374 16.2 Line and staff organization 375 16.3 Functional organization 376 16.4 The leadership continuum 380 16.5 Maslow’s needs hierarchy 385 16.6 Herzberg’s two-factor theory 388 16.7 Example of Vroom’s expectancy theory 389 List of tables 1.1 Contribution of the food and agricultural industries to the U.S. economy, 2009 10 1.2 Indicators of U.S. agriculture sector efficiency 10 1.3 Sales of the ten largest U.S. food retailers in 2009 18 1.4 Concentration ratios for top four, eight, and twenty firms’ share of U.S. grocery store sales, 1992–2009 19 1.5 Farm characteristics, by type of farm, 2007 25 1.6 Number of farms, land in farms, average size of farm, 1970–2009 26 1.7 Net income from farming, 1970–2009 28 1.8 Farm production expenses 30 2.1 Levels and nature of planning in the agribusiness 43 3.1 Susan Lambert’s accounting and economic profit 62 3.2 Demand and supply schedules for cereal 65 3.3 Interpretation of price elasticity of demand 72 5.1 Characteristics of developed and developing markets for food 106 5.2 USDA agricultural trade values 107 5.3 Comparing exporting and investing in international markets 117 6.1 Characteristics of product-driven, sales-driven, and market-driven organizations 125 6.2 Assessing internal strengths and weaknesses 131 7.1 Job description for feed salesperson 167 8.1 Competitor strength and weakness analysis 187 9.1 Balance sheet for Brookstone Feed and Grain company, December 31, 2009 203 9.2 Income statement for Brookstone Feed and Grain company, year ending December 31, 2009 204 9.3 Statement of owner’s equity for Brookstone Feed and Grain, year ending December 31, 2009 216 9.4 Statement of cash flows for Brookstone Feed and Grain company, year ending December 31, 2009 218 9.5 Balance sheet for Aggieland Landscaping company, year ending December 31, 2011 218 9.6 Pro forma statement of cash flows for Aggieland Landscaping company, year ending December 31, 2012 219 9.7 Pro forma balance sheet for Aggieland Landscaping company, year ending December 31, 2012 219 xii Tables 10.1 Dixie manufacturing company comparative balance sheets 228 10.2 Pacey farm store expense budget and control report 229 10.3 Account aging schedule 239 10.4 Sales increases required to offset bad debt losses 240 10.5 ABC farm supply store condensed balance sheet 248 10.6 ABC farm supply store condensed income statement 248 11.1 Example of the repayment schedule for a $5000 loan 253 11.2 Cash flow statement for three months ending March 2012 261 11.3 Pro forma monthly income statement 263 11.4 Pro forma balance sheet 264 12.1 Income statement for Brookstone Feed and Grain, year ending December 31, 2009 286 12.2 Classification of fixed and variable costs for Brookstone Feed and Grain company 288 13.1 Future value of $1 (compounded annually) 303 13.2 Present value of $1 (compounded annually) 304 13.3 Future value of $1 at compounded interest for an equal series of payments 305 13.4 Present value of $1 at compounded interest for an equal series of payments 307 13.5 Self-propelled fertilizer applicator simple rate of return calculations 311 13.6 Expansion of the grain storage simple rate of return calculations 312 13.7 Net cash inflows for the self-propelled applicator investment 315 13.8 Net present value for applicator investment with 14 percent discount factor 315 13.9 Net present value for applicator investment with 15 percent discount factor 317 13.10 Estimated net profit and depreciation expense for new sizing equipment 319 14.1 Examples of production systems and components 325 14.2 Characteristics of goods producers and service providers 326 14.3 Sales and marketing statistics for BioAg 344 15.1 Reasons for different inventory levels 355 17.1 Example of job specifications 399 17.2 Example of a job description 400 17.3 Example of a job application 402 17.4 Culpen County Farmers’ Co-op: employee evaluation 409 About the authors Dr. Freddie Barnard is Professor in the Department of Agricultural Economics at Purdue University. He works in the area of agricultural ﬁnance and focuses on two major groups: agricultural lenders and producers. In addition, he teaches the undergraduate course in agri- business management. He is involved in educational projects across the country that educate lenders on how to improve the quality of decision-making. Examples include his work with the industry-wide Farm Financial Standards Council that provides uniformity in ﬁnancial reporting and analysis for the agriculture industry. He also prepares instructional materials for agricultural lenders and producers, and teaches at several agricultural credit schools across the country. Dr. Jay Akridge is the Glenn W. Sample Dean of Agriculture at Purdue University. He is responsible for administering the academic programs in the College of Agriculture, the Indiana Agricultural Experiment Station, and the Purdue Cooperative Extension Service. Before being named Dean he was the James and Lois Ackerman Professor of Agricultural Economics and served as director of the Purdue Center for Food and Agricultural Business and the MS-MBA in food and agribusiness management. He has received several awards for teaching, including the Charles Murphy Award for Distinguished Undergraduate Teaching—Purdue’s highest teaching award—and the USDA Food and Agricultural Sciences Excellence in Teaching Award. He was added to the Purdue University Book of Great Teachers in 2003. His research has examined the buying behavior of commercial agricultural producers, innovations in marketing strategies by agribusiness ﬁrms, and adop- tion of new technology by agribusiness. He has worked with agribusiness managers in the areas of strategy and marketing in many countries including Lithuania, Australia, Argentina, Cameroon, and China. A native Kentuckian, his family owns and operates a fourth-genera- tion farm supply business in Fredonia, KY. Dr. Frank Dooley is a Professor at Purdue University in the Department of Agricultural Economics. He has won many awards for outstanding teaching and advising, including the Agricultural and Applied Economics Association Outstanding Undergraduate Teacher and the Charles B. Murphy Outstanding Undergraduate Teaching Award from Purdue University. He is also an active presenter in programs at the Center for Food and Agricultural Business. His research program in agribusiness focuses upon transportation and supply chain management. His work has studied issues in the food manufacturing and retailing, ethanol, transportation, and country grain elevator industries. Dr. John Foltz is Associate Dean and Director of Academic Programs for the College of Agricultural and Life Sciences at the University of Idaho. He works with student academic xiv About the authors issues and student organizations as well as student recruitment and retention efforts for the College. Previously, he served as a Professor in the Department of Agricultural Economics and Rural Sociology. He is an award-winning teacher and advisor, having received his College’s Outstanding Advising award, and the University of Idaho award for teaching excellence. He is a seven-time recipient of the University of Idaho’s Faculty Excellence Award, chosen by students as their most inﬂuential faculty member. His research has looked at country-of-origin labeling (COOL) in the beef industry; exploring the feasibility of carbon credit marketing by Idaho dairies; investigating the demand for consultants by Idaho dairy and potato farmers; researching consumer perceptions of trout as a food item; and teaching research involving class attendance and student performance, building the indus- try–institution interface and the use of case studies in the classroom. He co-writes a bi-monthly management column for Feed and Grain magazine. He received his Bachelor’s and Master’s degrees from Ohio State University. Upon graduation, he worked as a district manager for Ralston Purina in Ohio and Pennsylvania marketing livestock feed and animal health products. Subsequently, he received his Ph.D. in agricultural economics from Purdue. Preface This is an exciting time to be involved in the food and agribusiness industries. International markets are an inseparable reality for agribusiness managers. Information technology and the Internet make entirely new models for conducting business both possible and practical. Biotechnological developments raise exciting and challenging business and policy issues. Relationships among players in this system have continued to evolve and, as a result, the food production and marketing system is far more complex and interrelated today than it was a mere decade ago. Add to this the challenge of feeding an estimated nine billion people on earth by 2050—and agriculture and agribusiness will continue to be the nexus of attention! This rapidly changing, highly volatile, international, high-technology, consumer-focused world is the one in which today’s food and agribusiness managers operate. This fourth edition of Agribusiness Management was written to help prepare students and managers for a successful career in this new world of food and ﬁber production and marketing. What’s new The basic objective of this text has not changed through four editions: to give students and managers a fundamental understanding of the key concepts needed to successfully manage businesses, adding value to farm products and/or providing inputs to production agriculture. While there are many concepts in this book that will apply to the farm or production agriculture business, the text is focused on the food and input supply sectors of the food production and marketing system. This new edition of Agribusiness Management uses four speciﬁc approaches to help read- ers develop and enhance their capabilities as agribusiness managers. First, it offers a contemporary focus that reﬂects the issues that food and agribusiness managers face both today and likely will face tomorrow. Speciﬁcally, food sector ﬁrms and larger agribusiness ﬁrms receive more attention in this edition, reﬂecting their increasing importance as employers of food and agribusiness program graduates. Second, the book presents concep- tual material in a pragmatic way with illustrations and examples that will help the reader understand how a speciﬁc concept works in practice. Third, it has a decision-making empha- sis, providing managerial tools that readers will ﬁnd useful when making decisions in the contemporary business environment. Finally, it offers a pertinent set of discussion questions and case studies that will allow the reader to apply the material covered in real-world situations. More speciﬁcally, the opening section of the text has been completely re-organized to help students better understand the food and agribusiness marketplace, as well as management xvi Preface and basic economic principles. The second section includes chapters on forms of business organization and international agribusiness management, which is an area no contemporary book on agribusiness can ignore. In the third section, we start our discussion on the four functional areas of management—marketing, ﬁnance, supply chain, and human resources. Ultimately, all business activity revolves around the customer, and the text reﬂects this customer-oriented philosophy. The marketing management section has been substantially revised to reﬂect the current thinking in this area. The ﬁnance section also received a complete overhaul, and includes chapters on ﬁnancial reporting and analysis, with increased emphasis on credit analysis and management. The ﬁfth section, supply chain management, was completely rewritten to reﬂect the current thinking in this area. Finally, the human resource section was re-written, again to reﬂect what we now know about managing people. Preparing for a new food and agribusiness market requires the application of concepts and tools to current situations. This edition of Agribusiness Management ends every chapter with discussion questions that are either new or have been revised for this text. Also included are cases that cover a variety of situations and types of ﬁrm. We feel you will ﬁnd this mix of cases to be a distinguishing feature of the book. The bottom-line on this fourth edition of Agribusiness Management: this book is contem- porary, solid on the fundamentals, practical and applicable. It provides students and adult learners with an essential understanding of what it takes to be a successful agribusiness manager in today’s rapidly evolving, highly unpredictable marketplace. The readership Agribusiness Management was written for students. There are tremendous career opportuni- ties in the food and agribusiness industries. In this book, you will be exposed ﬁrst to the breadth of these opportunities, from research and development manager for a biotech company, to a logistics manager for a major food retail organization. You need to under- stand the marketplace and some of the unique institutional features of the food production and marketing system before embarking on a career as an agribusiness manager. Preparing for a career in agribusiness management also requires that you understand the fundamentals of management—the basic tasks of planning, organizing, directing, and controlling and the basic functions of marketing, ﬁnance, operations and logistics, and human resource manage- ment. In this book you will ﬁnd all of these topics covered in a straightforward way. And, we hope the many food and agribusiness examples and case studies bring these concepts to life for you. This is a book you will continue to use as a reference as your managerial career unfolds. Agribusiness Management was written for managers and soon to be managers who are already in the workforce. We have had the opportunity over the past 25 years to work with literally thousands of managers through the activities of the Center for Food and Agricultural Business at Purdue University. Most of the case studies and examples in this book come from these industry relationships and interactions. As the business environment changes, and as people assume new responsibilities, we see a need to retool in areas that an individual has not recently been applying in his/her job. For example, the production manager in a food processing ﬁrm who has been asked to serve on a task force focused on helping the ﬁrm become more customer oriented may need a “refresher” in marketing management. These individuals (and corporate learning and development directors and training managers) will ﬁnd this book useful in sharpening their skill set. Preface xvii Agribusiness Management was written for instructors. Over time, we have found that every instructor has his or her own take on what an agribusiness management course should look like. Some are introductory courses, other have more of a capstone orientation. Some of these courses are part of an entire curriculum in agribusiness management. In other cases, a program may offer only a course or two in the agribusiness area. The organization of this book is structured in a way that instructors will ﬁnd convenient when developing their course, wherever that course ﬁts in the program’s overall curriculum. An instructor could easily use the material in this edition over a single semester, or over a two semester or three-quarter course, covering each topic in more detail. Some instructors will ﬁnd that moving through the book from start to ﬁnish sequentially as part of a one- semester course makes the most sense. Others may drop chapters on specialized topics like international business or human resource management, because these topics are covered in other courses. For an advanced course, the book has plenty of rigor. Supplemented with outside case studies, this is an excellent text for a capstone-type course where the material here would be covered more quickly, and more time spent on some of the more advanced ideas. The new and updated cases and the discussion questions will be of value to all instruc- tors as they serve the needs of students hungry for applications and illustrations of the concepts and tools covered in the book. Outline of book In Part I, “Agribusiness Management: Scope, Functions, and Tasks,” we focus on the food and agribusiness industries and the role of the agribusiness manager. In addition, a set of economic concepts of fundamental importance to agribusiness managers is covered. Part I exposes readers to the tremendous variety of ﬁrms that comprise the food production and marketing system. The core focus of this book is the four functional areas of management— marketing, ﬁnance, supply chain, and human resources. Readers will better understand the role that managers of food and agribusiness ﬁrms play as they execute the four tasks of management—planning, organizing, directing, and controlling. Part II, “Agribusiness Management: Organization and Context,” leads readers toward better understanding the context or environment in which agribusiness managers operate by taking them inside the different forms of business organization, including cooperatives given their prominence in the food and agribusiness markets. This section also provides a glimpse into the issues an agribusiness manager must face when doing business outside of the United States. The challenges of serving international markets, of sourcing raw materials from international locations, and from competing with international ﬁrms have all emerged as key issues in the past decade. Looking to the future, this area promises to be even more important. We begin our look at the four functional areas of management in Part III with “Marketing Management for Agribusiness.” This section covers the fundamental concepts and tools an agribusiness manager uses in identifying its target market, and taking its product-service- information offering to the market. The marketing mix—product, price, promotion, and place—is covered in some detail. In addition, important tools for making marketing deci- sions are discussed. All of this material is presented in the context of the strategic marketing planning framework. Part IV, “Financial Management for Agribusiness,” starts with basic ﬁnancial statements, and moves through ﬁnancial ratios and ﬁnancing the agribusiness on to tools for making operating and capital investment decisions. This section addresses the fundamental elements xviii Preface of ﬁnance that any agribusiness manager should understand. A series of integrated exam- ples, and clear explanations of key terms, will help you better understand the language and concepts of ﬁnance. More importantly, you will better understand how to use ﬁnancial information when making managerial decisions. Part V, “Operations Management for Agribusiness,” looks at supply chain management. This section takes you into areas such as production planning, total quality management, and logistics management. Production/operations and supply chain management in agribusiness ﬁrms have undergone a profound change over the past two decades. And, these two chapters will provide a fundamental understanding of the key elements in this important area. Finally, in Part VI, “Human Resource Management for Agribusiness,” we look at key issues involved in managing a ﬁrm’s people resources. First, we explore issues around organizational structure and leadership. Then, we turn our attention to the personnel func- tions of hiring, training, evaluation, and compensation of employees. The ﬁnal section— the issues surrounding the human resource area—are likely the most pressing of all to an agribusiness ﬁrm facing a rapidly changing operating environment. This is an exciting time to be preparing for or retooling for a career in the food and agri- business industries. We have tried to capture some of that excitement in Agribusiness Management. We hope that you ﬁnd this book readable and interesting, challenging, and pragmatic, and most of all helpful as you better prepare yourself or your students for successful careers in the food production and marketing system. Web-based supplements Agribusiness Management is supported by a set of supplementary materials, which are available at the text’s support Web site: http://www.routledge.com/books/details/ 9780415596961/ Acknowledgments Any large project involves an equally large number of individuals, and this book is no exception. Our most important acknowledgment is to Research Development Editor Kathleen Erickson, who served a variety of roles while working on both the third and fourth editions, ranging from conducting background research to discussing content and focus as both editions of this manuscript moved from idea to reality. Also, we want to acknowledge the work done on previous editions of this textbook by Drs. Steven P. Erickson and W. David Downey. Their work provided the foundation for the fourth edition. Dr. Erickson passed away before the third edition of this book was published. He was a brilliant, award-winning educator, who received numerous teaching awards, including the American Agricultural Economics Association’s Distinguished Undergraduate Teaching Award and the Charles B. Murphy Award for Outstanding Undergraduate Teaching (Purdue’s highest teaching award). Dr. W. David Downey is Professor Emeritus of Purdue University. As a professor of agricultural sales and marketing at Purdue, Dr. Downey taught courses in agri-selling and agri-marketing strategy to undergraduate students from several disciplines. He was instrumental in the development of a curriculum in which students could earn a four-year B.S. degree in agri-sales and marketing—the ﬁrst such program in the U.S. He received much recognition for professional excellence, including four major teaching awards from Purdue University and two national awards from the American Agricultural Economics Association. Also, we need to acknowledge the role of both students and managers we have worked with for the past 30 years. Their input, comments, and suggestions have played an important part in shaping the ideas and presentation of this text. In addition, we sincerely appreciate the students enrolled in the undergraduate agribusiness course at Purdue University during the fall semester of 2011, who took the time to review and comment on the chapters, discussion questions, and cases studies contained in this textbook. Finally, we sincerely appreciate the sacriﬁces made by our families, since the time spent revising this textbook was time that would have otherwise been spent at home and with family members. Their understanding enabled the authors to invest the time required for this textbook to become a reality. Part I Agribusiness management Scope, functions, and tasks Plate Part I Retail Food Shot Productive, diverse, efﬁcient: Part I explores today’s food, production agriculture, and agribusi- ness sectors. Photo courtesy of USDA. 1 The business of agribusiness Objectives Describe management’s role in agribusiness Provide an overview of the functional responsibilities of management Describe the unique characteristics of the food and agribusiness industries Describe the size, scope, and importance of the food production and marketing system Understand the farm-food marketing bill and what it means to producers and consumers Provide an overview of the food sector, the production agriculture sector, and the input supply sector Outline trends in home and away-from-home food consumption, and trends among the types of ﬁrms that serve these markets Explore the production agriculture sector, and some of the key changes occurring on U.S. farms Outline the major inputs used by the production agriculture sector and key trends in input use Understand the types of ﬁrms involved in producing and distributing inputs to produc- tion agriculture Introduction It is exciting and diverse. It is changing quickly. It relies on the weather, uses an incredible array of technology, is tied in every way to our natural resources, and embraces the world. If you eat, you are involved in it as a consumer of its ﬁnal products. If you farm, you are involved in it as a producer of the raw materials that ultimately make their way to the end consumer. It is the extremely efﬁcient, very complex, global, food and ﬁber production and marketing system. This system is vast and it is fascinating: the next time you walk through your local gro- cery store, think about the number and type of diverse activities involved in growing, har- vesting, transporting, processing, and distributing food throughout the 50 states in the United States, and, more broadly, our world. The process by which a 260-pound hog moves from Carroll County, Indiana to a suburban superstore in Los Angeles (now in the form of a hot dog in a pre-packaged children’s meal) is very complex, yet it occurs every day in the food production and marketing system. 4 Agribusiness management: scope, functions, and tasks This food production and marketing system is made up of thousands of businesses, ranging from the small cow-calf producer in western Kentucky, to some of the largest corporations in the world. And, it is management that drives and directs the ﬁrms, farms, and food companies that come together in the food production and marketing system. A retail supermarket, a major corn processor, the local farm supply store, and a family farmer: each have a person or a group of people responsible for making sure that things get done. These are the managers. Their titles range from chief executive ofﬁcer to president to fore- man to son or daughter or spouse. However, wherever they are found within an organization, managers are responsible for assuring successful completion of the functions, tasks, and activities that will determine an organization’s success. This book focuses on the management of food, ﬁber, and agribusiness ﬁrms. We will take a careful look at food and agricultural business management and our deﬁnition of food and agricultural businesses is quite broad. So, when we use the term agribusiness management in the text, we are talking about the management of any ﬁrm involved in the food and ﬁber production and marketing system. Our discussion of agribusiness management in this book provides information, concepts, processes, ideas, and experiences that can contribute to your effectiveness in performing the functions and tasks of agribusiness management. This chapter will ﬁrst introduce you to the key functions of agribusiness management. Then, we will explore some the characteristics that make the food and agribusiness markets unique places to practice the art and science of management. The ever-changing food and agribusiness industries are then discussed. We will look at ﬁrms that (1) move ﬁnal products through the food and ﬁber system to the ultimate consumer, (2) transform raw agricultural products into the ﬁnal products desired by consumers, (3) produce raw food and ﬁber products, and (4) supply inputs to the farm or production sector. The key functions of management in agribusiness As you can imagine, the responsibilities of managers in agribusiness are highly varied and can range from ordering inputs for the year ahead, to hiring and ﬁring individuals, to making the decision to sell a multi-billion dollar international subsidiary. A chief executive ofﬁcer, for instance, is responsible for the overall activities of a large, diversiﬁed food or agribusiness ﬁrm. In such ﬁrms, teams of managers are likely responsible for specialized areas within the ﬁrm. On a smaller farm business, one individual may assume roles ranging from chief executive ofﬁcer, to manager, to laborer, managing multiple projects at different levels simultaneously. To better understand the form and process by which managers perform the tasks that are required to create and sustain a viable business, the practice of management can be broken down into four key functions: Marketing management Financial management Supply chain management Human resource management Ultimately, no matter how large or small the ﬁrm, managers have responsibilities in each of these areas. These four functions of management are explored in some detail in this book. However, it is important to have a basic understanding of each area as we develop our understanding of agribusiness management. The business of agribusiness 5 Marketing management Marketing, in a broad sense, is focused on the process by which products ﬂow through the U.S. food system from producer to ﬁnal consumer. It involves the physical and economic activities performed in moving products from the initial producer through intermediaries to the ﬁnal consumer. Marketing management involves understanding customer needs and effectively positioning and selling products and services in the marketplace. In agribusiness, marketing management is a key function within each of the sectors of agribusiness: the food sector, the production agriculture sector, and the input supply sector. Marketing man- agement represents an integration of several different activities: selling, advertising, web page design, promotions, marketing research, new-product development, customer service, and pricing—all focused on customer needs, wants, and, ultimately, the quest for customer satisfaction. It is this function of management that is most closely focused on the end-user, or the consumer/customer of the product or service produced. It is often argued that without satisﬁed customers effectively reached through marketing and sales, no business could successfully operate. Thus, marketing management plays a fundamentally important role in most food and agribusiness ﬁrms. Marketing management is focused on careful and planned execution of how, why, where, when and who sells a product or service and to whom it is sold. Decisions here include what products to produce, what services to offer, what informa- tion to provide, what price to charge, how to promote the product, and how to distribute the product. This management function is closely tied to the customer’s decision processes, and buyers differ widely in the food production marketing system—from teenagers for a food manufac- turing ﬁrm, to a soybean processor for a farmer, to a large integrated swine business for an animal health ﬁrm. The ways in which agribusiness buyers—all of the buyers just mentioned and many more—make a purchase decision continues to evolve and change. Financial management Proﬁt is the driver for agribusinesses as they work to generate the greatest possible returns from their resources. Successful achievement of this objective means making good decisions, and it means carefully managing the ﬁnancial resources of the ﬁrm. Financial management is involved in these areas and includes generating the data needed to make good decisions, using the tools of ﬁnance to make effective decisions, and managing the assets, liabilities, and owner’s investment in the ﬁrm. Financial information allows managers to understand the current “health” of the ﬁrm as well as to determine what actions the business might take to improve or grow. Balance sheets and income statements can provide a wealth of information useful in making deci- sions. Financial analysis provides agribusiness managers with insights by which to better base decisions. The tools of ﬁnance such as budgeting, ratio analysis, ﬁnancial forecasting, and breakeven analysis can be used by agribusiness managers to develop long-range plans and make short-run operating decisions. Another way in which the ﬁnancial agribusiness scene continues to change is in the sourcing of funds. Agribusiness ﬁrms are increasingly accessing larger amounts of funds or money from national and international capital and ﬁnancial markets. To be competitive in those markets, ﬁrms must generate rates of return comparable to other industries. In the past, small agribusiness companies may have been allowed by local lenders to exhibit only 6 Agribusiness management: scope, functions, and tasks modest ﬁnancial performance. Today, the national and international ﬁnancial markets expect performance in agriculture comparable to that in other industries if they are going to provide the agribusiness sector with the funding needed for expansion, growth, consolidation, tech- nological advancement, and modernization. The sheer amounts of funds needed to ﬁnance the future operations of a company will continue to increase dramatically. So will the need for managers who understand the tools and techniques used to source and manage those funds. For most agribusinesses, ﬁnancial management will be a critical component of agribusiness management. Supply chain management New technologies and concepts are rapidly hitting the workplace. This, in turn, changes the way agribusinesses do what they do. The push for quality, the drive for lower costs, changes in the supply chain, and general pressures to be more efﬁcient in meeting consumer demands are swiftly altering the production and distribution activities of agribusiness. Supply chain management focuses on these areas and provides the tools managers need to meet these operations and logistical challenges. As a result, supply chain management has come to the forefront as a key management function for the agribusiness manager. Operations management focuses on the direction and the control of the processes used to produce the goods and services that we buy and use each day. It involves several interre- lated, interacting systems. Operations management involves the strategic use and movement of resources. For instance, a snack food factory begins its process with corn from a food- grade corn producer and ends with tortilla chips, corn chips, crackers, etc. Managers must worry about issues of scheduling, controlling, storing, and shipping as the corn moves from the producer’s truck to the supermarket. Logistics management involves the set of activities around storing and transporting goods and services. Shipping and inventory costs are huge costs of doing business for many food and agribusiness ﬁrms. The logistics management function is focused on new ways to lower these costs, by ﬁnding better ways to ship and store product. Given advances in infor- mation technology, the analytical tools of supply chain management, and improved shipping technologies, this has been a dynamic area for food and agribusiness ﬁrms. In addition, the growth of global markets depends upon the performance of well managed supply chains. Successful agribusinesses are those who consistently produce faster, better, and cheaper. The management of logistics in food and agricultural supply chains will become increas- ingly focused on building such time-based advantage. Quicker response to consumer needs, faster delivery times, shorter product development cycles and more rapid recovery after service problems are all components of time-based advantage in supply chain management. At the same time, there is an incredible push for quality, safety, and integrity in food system production processes. Effective supply chain management will continue to be crucial in the successful execution of any strategic plan for agribusiness ﬁrms. Human resources management In the end, management is about people. Without the ability to manage the human element— the resources each business has in its employees—businesses do not succeed. When combin- ing efﬁcient management of the marketing/ﬁnance/supply chain functions of the business, with the thoughtful management of the human side of the business, managers are on the road to successful implementation of their strategy. The business of agribusiness 7 Agribusiness managers who can manage people well can signiﬁcantly impact both pro- ductivity and ﬁnancial success. Human resources management encompasses managing two areas: the mechanics of the personnel administration, and the ﬁner points of motivating people to offer and contribute their maximum potential. Decisions here include how to organize the ﬁrm, where to ﬁnd people, how to hire them, how to compensate them and how to evaluate them. Today’s lean agribusiness ﬁrms continue to demand more performance from their man- agers, sales force, and service and support personnel. For instance, in addition to superb selling skills, sales representatives will be expected to have intimate knowledge of technol- ogy and a fundamental understanding of the general management problems of their producer customers. Service personnel must be able to maintain increasingly complex equipment. Technical support staff will need to be experts at assimilating and using the massive amount of production data that a large dairy farm or crop farm using site-speciﬁc management practices will generate. These types of demands will require agribusinesses to hire individuals with greater initial skills as well as with the ability to grow into different jobs throughout the course of their careers. Agribusinesses will need to be ﬂexible while providing continuing education and development of key skills. Some examples of such skills are general business, negotiation, problem-solving, technical, information management, and communication. Recognition of raw ability, and then development and ﬁne-tuning these skills and abilities will be the human resource challenge. Managed well, that challenge will proﬁtably produce for the company. And, this is the role of human resource management in the food and agribusiness ﬁrm. Unique dimensions of the food and agribusiness markets It may be easy to argue that management theory and principles are the same for any type of business enterprise. The largest businesses in the country such as General Electric and Wal-Mart and the smallest one-person agribusiness are guided by many of the same general principles. And, in many cases, good management is good management, regardless of the type of ﬁrm, or the market it is operating in. Yet key differences between large and small businesses or between agribusinesses and other types of ﬁrms arise in the speciﬁc business environment facing the organization. While there are similarities, the markets facing General Electric’s wide range of businesses differ substantially. The automotive industry is different from the retail industry. Likewise the unique characteristics of the food production and marketing system cause management practices to differ for agribusiness ﬁrms. Our job is to better understand the similarities and differences in the functions and tasks of a food and agribusiness manager compared to other managers. As a professional, the manager might be compared to a physician. The knowledge and principles of medicine are the same, but patients differ in such vital details as age, gender, body mass index, and general health. The physician’s skill is to apply general medical prin- ciples to the speciﬁc individual to create the optimal outcome for the patient given the unique set of circumstances at hand. The manager, utilizing speciﬁc tools of marketing, ﬁnancial, supply chain management, and human resource management, must attempt to solve the problem at hand and create the best outcome for the ﬁrms long-term proﬁtability. Food and agribusiness markets differ from other markets in at least eight key ways, inﬂu- encing the business situation that food and agribusiness managers must practice. While one can ﬁnd examples of other industries where each point is important (for example, seasonality 8 Agribusiness management: scope, functions, and tasks is important to toy companies), combined these factors form the distinguishing features of the food and agribusiness marketplace. Food as a product. Food is vital to the survival and health of every individual. Food is one of the most fundamental needs of humans, and provides the foundation for economic development—nations ﬁrst worry about feeding their people before turning their atten- tion to higher order needs. For these reasons, food is considered a critical component of national security. And, as a result, the food system attracts attention from governments in ways other industries do not. Biological nature of production agriculture. Both crops and livestock are biological organ- isms—living things. The biological nature of crops and livestock makes them particu- larly susceptible to forces beyond human control. The variances and extremes of weather, pests, disease, and weeds exemplify factors that greatly impact production. These factors affecting crop and livestock production require careful management. Yet in many cases, little can be done to affect them outright. The gestation cycle of a sow or the climate requirements of wine grapes provide examples. Seasonal nature of business. Partly as a result of the biological nature of food production, ﬁrms in the food and agribusiness markets can face highly seasonal business situations. Sometimes this seasonality is supply driven—massive amounts of corn and soybeans are harvested in the fall. Sometimes this seasonality is demand driven—the market for ice cream has a series of seasonal peaks and valleys, as do the markets for turkey and cranberries. Such ebbs and ﬂows in supply and demand create special problems for food and agribusiness managers. Uncertainty of the weather. Food and agribusiness ﬁrms must deal with the vagaries of nature. Drought, ﬂood, insects, and disease are a constant threat for most agribusinesses. All market participants, from the banker to the crop production chemical manufacturer are concerned with the weather. A late spring can create massive logistical problems for ﬁrms supplying inputs to the crop sector. Bad weather around a key holiday period can ruin a food retailer’s well-planned promotional event. Types of ﬁrms. There is tremendous variety across the types of businesses in the food and agribusiness sectors. From farmers to transportation ﬁrms, brokers, wholesalers, proces- sors, manufacturers, storage ﬁrms, mining ﬁrms, ﬁnancial institutions, retailers, food chains, and restaurants—the list is almost endless. Following a loaf of bread from the time it is seed wheat prepared for shipment to the farmer until its placement on the retail grocer’s shelf involves numerous types of business enterprises. The variety in size and type of agribusinesses, ranging from giants like ConAgra to family farms, shapes the food and agribusiness environment. Variety of market conditions. The wide range of ﬁrm types and the risk characteristics of the food and agribusiness markets have led to an equally wide range of market structures. Cotton farmers ﬁnd themselves in an almost textbook case of the perfectly competitive market where individual sellers have almost no inﬂuence over price. At the same time, Coca-Cola and PepsiCo have a literal duopoly in the soft drink market. Some markets are global, others local. Some markets are characterized by near equal bargaining power between buyer and seller, while others may be dramatically out of balance in one direc- tion or the other. Rural ties. Many agribusiness ﬁrms are located in small towns and rural areas. As such, food and agribusiness are likely the backbone of the rural economy and have a very important role in rural economic development. The business of agribusiness 9 Government involvement. Due to almost every other factor raised above, the government has a fundamental role in food and agribusiness. Some government programs inﬂuence commodity prices and farm income. Others are intended to protect the health of the consumer through safe food and better nutrition information. Still other policies regu- late the use of crop protection chemicals, and affect how livestock producers handle animal waste. Tariffs and quotas impact international trade. School lunch programs and food stamps help shape food demand. The government, through policies and regula- tions, has a pervasive impact on the job of the food and agribusiness manager. Each of these special features of the food production and marketing system affects the environment where an agribusiness manager practices their craft. Agribusiness is unique and thus, requires unique abilities and skills of those involved with this sector of the U.S. economy. The food production and marketing system The highly efﬁcient and effective food production and marketing system in the U.S. is a result of a favorable climate and geography; abundant and specialized production and logistics capabilities; intense use of mechanical, chemical, biological, and information tech- nologies; and the creative and productive individuals who lead and manage the ﬁrms which make up the food and agribusiness industries. This U.S. food production and marketing system produces enormous supplies of food and ﬁber products. These products not only feed and clothe U.S. consumers, but are also exported to the international marketplace to fulﬁll needs of consumers around the world. The food production and marketing system encompasses all the economic activities that support farm production and the conversion of raw farm products to consumable goods. This broad deﬁnition includes a farm machinery manufacturer, a fertilizer mine, a baby food factory, the paper ﬁrm that supplies cardboard boxes, rail and trucking ﬁrms, wholesalers, distributors, and retailers of food, restaurateurs, and many, many others. The U.S. food production and marketing system is extremely large, directly employing over ten million workers, generating $646 billion worth of value-added products and serv- ices in 2009 (Table 1.1). The output of this system represents 4.6 percent of the total value added production to the gross domestic product (GDP) of the U.S. economy. Note that the U.S. economic activity also includes the contributions of ﬁrms providing inputs to the farm, forestry, and ﬁsheries sectors. In 2009, $207.6 billion of energy, materi- als, and purchased inputs were used by farming and related ventures, representing 1.5 per- cent of GDP (Table 1.1). In addition, the food and agribusiness sectors are key contributors to the economic activity of transportation, wholesaling, and retailing in the U.S. Prior estimates put this effort at 5.4 percent of U.S. GDP (Edmonson 2000). Food and agricultural systems vary widely across the globe. Countries with higher per capita GDP (over $25,000) typically have a lower proportion of their population (under 3 percent) involved in production agriculture (Table 1.2). In contrast, the characteristics of the less developed countries ﬁnd a lower GDP per capita and a higher proportion of the popula- tion involved in production agriculture. In China, 40 percent of the population is involved in farming, while in India the ﬁgure is 52 percent. The continued economic growth of these countries is fueling a tremendous demand for additional inputs, as well as branded food products. As a result, many U.S. ﬁrms are attempting to establish joint ventures with ﬁrms in these countries to aid in this development process, and build future markets in the process. 10 Agribusiness management: scope, functions, and tasks Table 1.1 Contribution of the food and agricultural industries to the U.S. economy, 2009 Value Added % Share of Number of % Share of Total to GDP U.S. GDP FTE Workers U.S. Employment (billion $) (000) U.S. GDP 14,119.0 121,805 Farms 104.0 0.74 634 0.52 Forestry, ﬁshing, and related 29.2 0.21 425 0.35 activities Food and beverage and 206.1 1.46 1,578 1.30 tobacco products Textile mills and textile 17.6 0.12 240 0.20 product mills Apparel and leather and allied 11.7 0.08 189 0.16 products Food services and drinking 277.1 1.96 7,366 6.05 places Total for Food and 645.70 4.57 10,432 8.56 Agricultural Industries Total Inputs for Farms, 207.6 1.47 Forestry and Fisheries Energy inputs 21.6 0.15 Materials inputs 127.5 0.90 Purchased inputs 58.5 0.41 Source: U.S. Department of Commerce. Table 1.2. Indicators of U.S. agriculture sector efﬁciency Country GDP per % Labor % of GDP in Average % Personal Capitaa Force in Agriculturea Farm Size in Consumption 2010 (U.S. $) Agriculturea 2000bAcres Expenditures Spent on Food Consumed at Home 2007c United States 47,400 0.7 1.2 440.7 5.7 Argentina 14,700 5.0 8.5 1,439.2 20.2 Australia 41,300 3.6 4.0 8,014.0 10.7 Brazil 10,900 20.0 6.1 179.8 24.6 Canada 39,600 2.0 2.0 675.5 9.2 China 7,400 39.5 9.6 1.7 34.9 Egypt 6,200 32.0 13.5 2.0 38.8 Germany 35,900 2.4 0.8 100.0 11.4 India 3,400 52.0 16.1 3.3 32.4 Japan 34,200 3.9 1.1 3.0 14.6 Mexico 13,800 13.7 4.2 60.7 24.2 South Korea 30,200 7.3 3.0 2.6 15.4 Spain 29,500 4.2 2.9 59.1 13.6 United Kingdom 35,100 1.4 0.9 175.1 8.6 Source: a Central Intelligence Agency. b Food and Agriculture Organization. c Meade 2008. The business of agribusiness 11 Farm size varies dramatically, even among developed countries (Table 1.2). Geography or limited farmland, climate, crop, or livestock focus, or simply the area needed to maintain a viable production unit helps explain this variation. This has important implications for the types of agricultural inputs needed in different parts of the globe. An 8,000 acre wheat farmer in Australia has much different expectations and needs from equipment and technology than a Chinese farmer on his or her two-acre plot. The overall efﬁciency of the U.S. food and ﬁber sector is illustrated by the proportion of personal consumption expenditures allocated to food consumed at home. For the average U.S. consumer, only about 6 percent of their total personal consumption expenditures are for food consumed at home (Table 1.2). In Japan this ﬁgure is about 15 percent, while food accounts for almost one-third of an Indian consumer’s personal consumption expenditures. The efﬁciency of the U.S. food production and marketing system is really quite remarkable. Consider this: with 8.4 percent of the world’s agricultural land and 4.5 percent of the world’s population, the U.S. food system produces 13 percent of the world’s livestock and 14 percent of the world’s crops (FAO). In 2009, the U.S. produced 41 percent of the world’s soybeans, 41 percent of the corn, 16 percent of the grain sorghum, and 9 percent of the wheat. A primary requirement for being a successful agribusiness manager is a solid understand- ing of this food production and marketing system. Regardless of what speciﬁc part of the food system you work in, it is important to understand what happens to food and ﬁber products both before they reach your ﬁrm, and after they leave your ﬁrm and head to the consumer. Plate 1.1 Traditional Agriculture Income spent on food by a country’s people is heavily inﬂuenced by the agricultural production technologies in use. Photo courtesy of USDA Natural Resources Conservation Service 12 Agribusiness management: scope, functions, and tasks The farm-food marketing bill—a perspective on the system An important part of understanding agribusiness comes from understanding just how and what consumers spend on food. In 2009, Americans consumers spent $1.2 trillion on food for at home and away from home consumption—up 95 percent from the $607 billion spent in 1993 (Figure 1.1). A better understanding of just what that spending is all about comes from looking at the farm-food marketing bill. The farm-food marketing bill breaks down the proportion of the consumer’s food dollar that goes to the farmer for raw products and that goes to the food industry for “marketing” those raw farm products to end consumers (Canning 2011). Marketing includes the value added from processing, packaging, transportation, retail trade, food services, energy, ﬁnancial and insurance, and other to make agricultural products ready for the consumer. In 2008, for every dollar spent on food, $0.84 was spent on marketing the product, while $0.16 went to the farmer (Figure 1.2). From 1993 to 2009, the farm share of the marketing bill rose from $112 to $187 billion, while the marketing share has increased by $500 billion to $996 billion (Figure 1.1). This long-term trend reﬂects continuing increases in farm productivity (which keeps farm prices relatively low), the increase in consumer demand for convenient, highly processed food products, increases in food consumed away from home, and increases in prices for many components of the marketing bill including labor, transportation, and energy. In turn, this fuels the steady widening of the food marketing bill as compared to the farm value of con- sumer food expenditures. Figure 1.3 identiﬁes the value added to the consumer food dollar in 2008 by ten different industry sectors. The farm and agribusiness share represents 11.6 cents of each consumer food dollar, net of farm costs (Canning 2011). The retail trade and food services sectors contribute almost half of the value added to the consumer food dollar, at 13.6 and 33.7 cents, respectively. The food processing sector is 18.6 cents of each food dollar. The 22.5 cents for 1,200 1,000 Consumer expenditure 800 Billion $ 600 Food marketing bill 400 200 Farm value 0 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Year Figure 1.1 Farm value and the marketing bill for consumer food expenditures, 1993–2009 Source: Canning 2011. The business of agribusiness 13 15.8¢ 84.2¢ Firm share Marketing share Figure 1.2 2008 farm-food marketing bill Source: Canning 2011. s e es nc sin ura ng on bu ssi s ns ce ti gri e ce &i rta Tra ging rvi ad &a pro po se ce l tr y cka erg ns an r rm tai od od he Fin Re Pa En Fa Fo Fo Ot.6¢.6¢ ¢ ¢.6¢ ¢ ¢ ¢ ¢ 4.0 3.5.7 6.8 4.4 3.8 11 18 13 33 “Other” comprises advertising (2.0¢) and legal and accounting (1.8¢) Figure 1.3 Industry sector value-added for the 2008 food marketing bill Source: Canning 2011. 14 Agribusiness management: scope, functions, and tasks all other sectors suggests that the impact of the food and agribusiness sector as deﬁned in Table 1.1 is undervalued. Yet without the contribution of transportation, energy, or packag- ing, the product would not reach the end consumer. In the food dollar accounts, the ten industry sectors that transform agricultural commodi- ties to food products use four main factors of production to add value. The four are salary and beneﬁts, property income, output taxes, and imports. At 50.8 cents per food dollar, salary and beneﬁts comprise half of the food dollar (Figure 1.4). The 33.0 cents of property income represents payments for machinery, equipment, structures, natural resources, prod- uct inventory, or other assets that compensate the various owners for services provided (Canning 2011). The remainder of the 2008 food dollar is split between the U.S. government for taxes and imports or international assets. The three primary sectors of the food system The U.S. food production and marketing system, for purposes of discussion in this text, is divided into three sectors: the food sector, the production agriculture sector, and the input supply sector (Figure 1.5). We start with the food sector. This is the sector in which food processing, marketing, and distribution occurs (Figure 1.5). Here we have ﬁrms such as Kraft, Hormel, Kroger, and McDonald’s, as well as thousands of other ﬁrms, large and small. This group closely tracks consumer tastes and preferences, adapting to meet changing needs. Next in line is the production agriculture sector. Purchased inputs, natural resources, and managerial talent are combined to produce crop and livestock products. Agribusinesses in this sector vary in size, number, and focus—from the local grower selling strawberries to neighbors to the 100,000 head cattle feedlot; from the rice farmer in Louisiana to the canola grower in North Dakota; from the pork producer in North Carolina to the mega-dairy in Arizona. Output Imports taxes Property income Salary and benefits 7.8¢ 8.4¢ 33.0¢ 50.8¢ Figure 1.4 Factor payments for the 2008 food marketing bill Source: Canning 2011. The business of agribusiness 15 Food sector Production agriculture sector Input supply sector Figure 1.5 The food production and marketing system The food production and marketing system ends (or begins) with the many, varied activ- ities that take place in the input supply sector. This sector is responsible for providing the thousands of different inputs—both products and services—to production agriculture. Firms here include DuPont, Syngenta, John Deere, DeLaval, or your local cooperative, as well as hundreds of other ﬁrms that manufacture and distribute the inputs that farmers and ranchers need in their businesses. Let’s take a closer look at each of these sectors. The food sector At some point, it all comes down to getting raw farm commodities processed, packaged, distributed, and sold to the consumer. A very wide variety of processing and marketing ﬁrms are responsible for adding value or utility to commodities as they leave the farm gate. We will start our look at the food sector with food retailers and away from home food ﬁrms. Then, we will look at wholesaling ﬁrms, food manufacturers and processors, and assembly and transportation ﬁrms. We will end this section with a focus on the linkages across ﬁrms in the food sector, and between the food sector and the other sectors in the food production and marketing system. Food retailing The food retailing sector accounts for 13.6 percent of the value-added to the consumer food dollar (Figure 1.3). No longer is food moved just through the typical supermarket, as the food retailing sector has fragmented since the late 1980s. Food store formats are classiﬁed into three general categories: grocery stores, supercenters, or other food stores. The grocery category includes traditional supermarkets, as well as convenience stores, superettes, and small grocery stores, and specialty food stores (such as meat markets, ﬁsh markets, or bakeries). The category of warehouse clubs and supercenters was ﬁrst dominated by warehouse stores such as BJ’s Wholesale Club or Costco. More recently, growth in this sector has been driven primarily by Wal-Mart and Target. Other food stores include food retailed via mass merchandisers, drug store/combination stores, mail-order, home-delivered 16 Agribusiness management: scope, functions, and tasks Plate 1.2 Man shopping There are a variety of retail store formats competing for the business of U.S. food consumers. Photo courtesy of USDA food, and farmers markets. Key attributes for some of the most common store formats are brieﬂy described (Kaufman 2007): Supermarket: the conventional prototype typically carries about 15,000 items in a 10,000 to 25,000 square foot store. Superstore: has at least 40,000 square feet, which leads to a greater variety (25,000 items) of products, especially non-food items. The strategy is to promote the conven- ience of one-stop shopping, by providing additional service and selection. Convenience store (without gasoline): a small grocery store, selling a limited variety of basic foods, snack foods, and non-food products, typically with extended hours. Grocery products account for 45 percent of sales. Ready-to-eat and fountain beverages represent about 10 percent of sales. Packaged liquor, beer, and wine, and tobacco products account for another 35 percent of sales. Warehouse Club Stores: no-frills, membership-based, wholesale-retail hybrid outlets. These “box stores” serve both small businesses and individual consumers in a large warehouse-style environment. Grocery products (in large and multi-pack sizes) account for about 30 percent of sales. General merchandise (clothing, electronics, small appli- ances, and automotive products) accounts for 70 percent of sales. Following a low-price strategy, these stores typically stock fast moving, non-perishable products, carrying 6,000 to 12,000 items in stores from 10,000 to 15,000 square feet. The business of agribusiness 17 Supercenter: a large combination supermarket and discount general merchandise store, averaging 170,000 square feet of ﬂoor space. Grocery products account for up to 40 percent of ﬂoor space. Total food store sales have climbed from $242 billion in 1986 to $600 billion in 2009 (Figure 1.6). In 1986, grocery stores accounted for 89 percent of food sales, while warehouse club and supercenter sales were inconsequential. Since then sales at warehouse clubs and supercenters have steadily increased, accounting for 19 percent of food sales in 2009. This growth has largely come from an erosion of sales at supermarkets, whose market share of the food dollar for at home consumption has fallen to 66 percent. Other food stores have accounted for roughly 15 percent of the market over time. They may be poised for growth as the local foods movement gains traction (Martinez 2010). Since 1997, the total number of grocery stores has fallen by almost 9 percent, to 63,384 stores in 2009 (Figure 1.7). The number of convenience stores and specialty stores has been relatively stable at around 25,000 stores each over this time frame. In contrast, the number of warehouse and supercenters has almost tripled, from 1,530 to 4,411 stores, as consumers are drawn by the convenience of one-stop shopping and competitive prices. The 1990s saw widespread consolidation in the grocery industry, as small “mom and pop” chains were acquired or merged by larger grocers, who adapted to compete with the entry into food retailing by Wal-Mart. This has resulted in fewer, but larger food retailing ﬁrms. Table 1.3 identiﬁes the ten largest chain stores in terms of total annual sales. Wal-Mart has become the number one food retailer, followed by Kroger and Costco. This consolida- tion has led to a steady increase in industry concentration. From 1992 to 2009, the market share for the top four grocery ﬁrms more than doubled, from 17 to 37 percent, while the 600 550 500 450 400 350 Billion $ 300 250 200 150 100 50 0 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Year Grocery Warehouse clubs and supercenters Other food stores Figure 1.6 Food sales by retail sector, 1986–2009 Source: Clauson 2010. 18 Agribusiness management: scope, functions, and tasks 140,000 5,000 4,500 120,000 4,000 Number of grocery stores Number of supercenters 100,000 3,500 3,000 80,000 2,500 60,000 2,000 40,000 1,500 1,000 20,000 500 0 0 97 98 99 00 01 02 03 04 05 06 07 08 Year Supermarkets Convenience stores Specialty Warehouse Figure 1.7 Number of food stores, by category, 1997–2008 Source: County Business Patterns. Table 1.3 Sales of the ten largest U.S. food retailers in 2009 Rank/Retailer Number of Food U.S. Food Store Sales Stores Owned (billion dollars) 1. Wal-Mart Stores 4,624 262.0 2. Kroger Co. 3,634 76.0 3. Costco Wholesale Corp. 527 71.4 4. Supervalu 2,450 41.3 5. Safeway 1,730 40.8 6. Loblaw Cos. 1,036 29.9 7. Publix Super Markets 1,018 24.3 8. Ahold USA 707 22.3 9. Delhaize America 1,608 19.0 10. 7-Eleven 6,123 17.5 Source: Supermarket News 2010. share for the top 20 ﬁrms climbed from 39 to 64 percent (Table 1.4). Concerns over increas- ing concentration led to a series of ﬁve hearings conducted by the Department of Justice and Agriculture in 2010 about antitrust enforcement (U.S. Department of Justice). Food retailing remains an extremely competitive industry with little margin for error. Warehouse and supercenters compete in part because of their supply chain management expertise. For example, Wal-Mart is a leader in the adoption of information technologies such as radio frequency identiﬁcation (RFID) or centralized checkout stands. All types of food retailers are increasingly looking to store or private label offerings. While some The business of agribusiness 19 Table 1.4 Concentration ratios for top four, eight, and twenty ﬁrms’ share of U.S. grocery store sales, 1992–2009 Year Top 4 Firms % Top 8 Firms % Top 20 Firms % 1992 17 26 39 1997 19 31 46 2002 30 44 56 2003 33 47 59 2004 34 47 59 2005 36 49 62 2006 35 48 60 2007 38 50 64 2008 38 51 65 2009 37 50 64 Source: Kaufman and Kumcu 2010. argue that fewer and larger retail food outlets will mean a more general selection offered by retailers, others insist that larger retailers can offer a broader assortment of more competitively priced products to customers. The industry is mature, and performance will be driven by disposable income, consumer tastes and preferences, and female participation in the workforce. Food service The food services sector comprises the largest share of the 2008 food dollar, at 33.7 percent (Figure 1.3). The food service industry, which employs 9.2 million people, consists of three major types of ﬁrms—traditional restaurants, fast food/quick service restaurants, and insti- tutional food service ﬁrms. The nation’s 528,000 restaurants hit $533 billion in sales in 2009, up from $248 billion in 1990 (Figure 1.8). The food service industry saw steady growth, especially since 1990 as busy people, dual career families, and a more afﬂuent, mobile society chose the luxury, or some would say the necessity, of eating more meals away from home. In 1960, only 26 percent of the food dollar was spent on food away from home (Figure 1.9). Since 2000, the proportion of the food dollar spent eating out and at home has been almost equal. The USDA predicts that by 2020, 52 percent of the food dollar will be spent on food away from home. TRADITIONAL RESTAURANTS Traditional restaurants, also called full-service restaurants, saw sales of roughly $213 billion in 2009 (Clauson and Leibtag 2011). Despite a slowdown in the general economy, afﬂuent baby boomers are the most frequent customers at full-service restaurants. Reﬂecting a cultural change among Americans, eating out at full-service restaurants plays an important social function for today’s customers. Whereas 30 years ago socializing and entertaining were done at one’s home, today’s consumer meets family, friends, and co-workers at the local restaurant for leisure, conversation, and convenience. There is a growing disparity among restaurant types. Substantial growth is expected for casual dining restaurants with per person checks in the range of $15–$20. These full-service restaurants may cater to families 20 Agribusiness management: scope, functions, and tasks $700 $600 $500 $400 Million $ $300 Food at home $200 Food away from home $100 $0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Year Figure 1.8 Sales of food at home and away from home, 1990–2009 Source: Clauson 2010. 100% 90% 80% 70% 60% 50% 40% 30% 20% At home Away from home 10% 0% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Year Figure 1.9 Percentage of sales of food-at-home and away-from-home, 1960–2020 Source: Westcott 2011. The business of agribusiness 21 or those looking for a more relaxed dining experience. Cuisines at full-service restaurants have shifted towards Italian, Mexican, Japanese, Thai, Caribbean, and Middle Eastern foods, as U.S. tastes broaden. FAST FOOD/QUICK SERVICE The words “fast” and “quick” not only describe the service provided by these restaurants, they also describe the rate at which this industry changes. Since 1990, fast service food ﬁrms such as McDonald’s, Taco Bell, and Wendy’s have more than doubled their sales, from $87 to $195 billion. Established as part of American culture, fast food restaurants have stepped into the next dimension of customer service by experimenting with the offerings and specials on their menus, and faster, better means of providing customers with both fast and nutritious foods. Rising concerns about obesity are leading to new menus. Today’s fast food/ quick service restaurants often have central wholesale warehouses and buying ofﬁces, and many have expanded internationally as U.S. markets have become saturated. INSTITUTIONAL FOOD SERVICE In 2009, over 38,000 ﬁrms were involved in institutional food marketing, with sales of $128 billion. This category includes food offered at hotels, schools and colleges, govern- ment ofﬁces, corporate eating establishments, airlines, hospitals, etc. Institutional food services account for an important portion of the food people consume daily. Some types of institutional food service ﬁrms expanded rapidly during the 1990s (recreation and enter- tainment facilities, and retail hosts such as gas stations and bookstores), while sales through other ﬁrms in this category were stable or declining (hospitals, vending machines, and the military). Trends and changes in the institutional food service industry will continue to reﬂect consumer demands for convenience and nutrition. For instance, 30 years ago, it would have been unusual to see ethnic foods, a food now considered common, on the menu of a major university’s dorm cafeteria. Food wholesaling In 2009, food wholesaling represented a $678 billion dollar business conducted by 26,745 wholesalers employing almost 800,000 employees (County Business Patterns). While there are several ways to categorize the work done by wholesalers, three basic categories capture most ﬁrms in this industry. Merchant wholesalers represent the largest percentage of food wholesale sales accounting for 70 percent of the total. Merchant wholesalers prima- rily buy groceries and grocery products from processors or manufacturers, and then resell those to retailers, institutions, or other businesses. Manufacturers’ sales ofﬁces and sales branches (MSBOs) are wholesale outﬁts typically run by large grocery manufacturers or processors to market their own products. Wholesale agents and brokers are wholesale operators who buy and/or sell as representatives of others for a commission. Wholesale bro- kers and agents typically do not physically handle the products, nor do they actually take title to the goods. Most wholesale operations focus on sales to retailers, other wholesalers, industrial users, and, in some cases, the ﬁnal consumer. A wholesaler may buy directly from the producer and sell to another wholesaler or food processor. More typically, however, the wholesaler buys from the food processor or manufacturer and sells to a retailer. The make-up of the 22 Agribusiness management: scope, functions, and tasks wholesale trade sector involves a large group of varied organizations—some quite small and some very large. Chain stores own their warehousing facilities, but typically break this out into a separate operating unit with the objective of generating a proﬁt. Wholesalers perform a variety of functions for their retail customers. It is important to note that wholesalers are facilitators and that they may take market risk if they take title to the goods they handle. These ﬁrms are responsible for distributing the product in appropriate quantities across a geographic region. Often wholesalers will ﬁnance inventory purchases for the retailer. In this case, the retailer does not have to borrow money from the bank, but uses the wholesaler as a source of operating funds. Many wholesalers offer se

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