Industrialization
is becoming an accepted term that describes fundamental
changes in U.S. agriculture. And while those outside
agriculture might associate the term with the
Industrial Revolution, the current agricultural
revolution is far more technologically advanced.
The defining features of industrialization now
include a shift from food commodities to food
products and a shift from spot auction markets
to more direct market channels, such as production
contracts.
Though powerful, industrialization is not having
a uniform effect on U.S. agriculture. Some industry
segments like broilers are almost completely industrialized,
at least in terms of the two main defining features.
But others, like grains, primarily operate like
traditional commodity markets.
Currently, a rapid move toward industrialization
in the pork industry is leading to great public
interest in industrialization's future course.
Farmers, consumers, state and federal legislators,
and industry regulators increasingly wonder whether
industrialization is just a steady current of
change, or whether the pork industry reflects
a new tidal wave, ready to spill over to many
other parts of agriculture. A review of industrialization
suggests that it is both current and wave--it
is not new, but it does appear to be speeding
up. Put another way, the changes amount to a quiet
revolution in agricultural markets, with change
that is fundamental but until recently, unheralded
(Barkema, Drabenstott, and Welch 1991 p. 25-39;
Schertz and Daft 1994 p. 23-31).
Why Industrialization?
At root, industrialization results from a new
consumer and a new producer and the impact these
two players have on the markets where they meet
(Barkema 1993 p. 1126-31). The new consumer is
a highly demanding sort, the kind of buyer who
knows that its action can humble even huge corporations
like Sears and General Motors. The new producer
is armed with panoply of new technology and management
tools that enable food to be engineered--from
the farm to the dinner table. A more demanding
consumer and a more capable producer would seem
to be a match made in heaven--and it is to a considerable
degree. The only problem is that the traditional
markets that have moved from farmers to consumers
don't broker these kinds of marriages very well.
The New Food Consumer
New lifestyles, shifting demographics, and a growing
appreciation for the link between diet and health
are leading to wholesale change in the way Americans
eat and the foods they buy. These food consumption
changes have splintered the mass food market into
myriad niches (Kinsey 1994 p. 58-72). Food companies
can no longer launch a broadside of standardized
products at a mass market and be assured of marketing
success. Rather, they must market customized products,
each aimed at a separate food market niche. Some
products may derive from common production processes,
but many do not. Rather, a new generation to technology
is permitting more and more products to be driven
by the characteristics consumers’ want--from
start to finish.
This trend is increasingly recognized, but it
is worth noting that the food industry is actually
just sharing a broader trend that is evident in
all consumer-goods industries. Whether a firm
makes pens or planes, buyers demand more and their
patience is shrinking. "Instead of choosing
from what you have to offer, the new consumer
tells you what he or she wants. You figure out
how to supply it" (Fortune 1993 p. 6). To
be sure, shifts in food consumption partly reflect
a food consumer who has been given more food choices
by the industry. But consumers are demanding more
than choice; they also want quality, consistency,
and value. To a considerable extent, therefore,
industrialization is about converting agriculture
from a "here's what we produce" mentality
to "here's what consumer's want" credo.
The New Producer
Advances in agricultural technology increasingly
make possible food engineering from farm and ranch
to consumer. The new technology can be usefully
divided into biotechnology and information technology
(Phillips 1994 p. 21-34). Although U.S. agriculture
appears to be only on the day of a new frontier
of biotechnology advance, the possibilities are
quantum in scale. And, more importantly, they
lead to unprecedented precision. Biotechnology
will enable the food industry to isolate and incorporate
specific traits into food products, a paramount
demand of the new consumer. For example, scientists
may be able to change genes so that cattle and
hogs convert feed into more lean tissue and less
fat. Similarly, genetic changes might be achieved
to reduce the cholesterol level in eggs.
Equally intriguing, especially in the near term,
may be information technology. To date, the power
of scanning technology has not yet been fully
harnessed in the food industry. But the day may
soon come when retailers will influence food production
much more than they do now. Scanning information
is potentially the most potent weapon in targeting
products for consumer palates and pocket books.
Many retailers now have precise information about
which products sell and to whom. Such information
permits food companies to fine-tune product formulations,
packaging, and marketing strategies with much
greater precision than ever before. (Boehlje 1996
p. 30-33)
Needs are Specific, But Markets are General
The combination of new consumers and new producers
is bringing great change to the market institutions
where consumers, producers, and processors meet.
The change is driven by the need to bring product
specificity to markets traditionally accustomed
to moving broadly graded commodities. Historically,
bulk commodities flowed through commodity markets
to food processors, which in turn marketed standardized
products to consumers. But consumers now want
tailored foods, and to ensure that they get them
processors want more specific farm products.
In response, processors and producers in many
segments of U.S. agriculture now go around traditional
spot markets to more direct market channels. These
end range from market contracts to outright ownership,
or complete vertical integration. This trend was
first established in broilers and vegetables,
but more commodities have moved in this direction
over the past three decades. Today, more than
half of all production of vegetables (both fresh
and processed), citrus, potatoes, sugar, seed
crops, eggs, fluid milk, broilers, and turkeys
take place through production contracts or vehicle
integration. (Barkema, Drabenstott, Welch 1991
p. 25-39)
Why is Industrialization Accelerating?
Industrialization appears to be accelerating due
to a convergence of industry forces, all of which
are pushing the industry toward a product focus
and nontraditional market channels. The new consumer
and new producer are two of these forces, but
two additional ones accentuate them.
New technology will gain broad acceptance quickly
because it is arriving at the same time as a new
generation of producers. The average farm operator
in the United States continues to grow older,
pointing to a likely acceleration in farmer retirements
and farm turnover in the decade ahead. The new
generation of producers expects to produce different
markets. Moreover, many farm businesses being
purchased need new capital equipment. (Drabenstott
1994 p. 4-8)
Meanwhile, a new generation of food industry
firms is playing a bigger role in industrialization.
These firms--input suppliers, processors, and
retailers--might be called the integrators. Through
the course of the 1980s, many of these firms grew
through consolidation and product line diversification.
These firms are capital-intense and thus must
be adept at managing their risks. Focusing on
the consumer while keeping an eye on Wall Street,
these firms see industrialization as an effective
way to manage risks that are greater and more
complex. Industrialization can reduce many types
of risks. It reduces supply risk by guaranteeing
consistent, trait-specific products. It reduces
financial risk by reducing the variability in
input prices.
In sum, the move to production contracts and
vertical integration is not happening evenly across
agriculture, but the past three decades have brought
quite a bit of change. Broilers were almost completely
"industrialized" thirty years ago, and
grains still resist the trend. But the other industry
segments are all moving in the direction of industrialization,
with most more than halfway there. (Drabenstott
1994 p. 4-8)
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