Agricultural and Food Policy, International Relations/Trade, Marketing,

Purcell, Joseph C.

Williams, Floyd W.

English

Research Papers in Economics

JOURNAL OF AGRIBUSINESS  FEBRUARY, 1987 
INTRODUCTION TO THE ECONOMICS OF 
CHANGING MARKETS AND EVOLVING 
TECHNOLOGIES 
Joseph C. Purcell and Floyd W.  Williams 
As  the  end  of  the  1980s  approaches.  the 
economics  of  the  United  States  agricultural 
sector  and  kindred  economic  activities  is 
enshrouded  in  uncertainty.  Following  tw 
decades  of  relative stability during the 1950s 
and  1960s.  the  1970s  was  an  era  of  an 
unprecedented  boom  in agricultural  connodity 
markets  followed  by  a  bust  and  severe 
financial  crisis  in  the  1980s.  A  major 
challenge  confronting  agricultural  economists 
is that  of  gaining  insight  and  understanding 
of  the cause-effect  relationships  operating  in 
the  global  agricultural-food  system. 
Assimilation  of  theory,  logic,  and  historical 
data  is  required  as  the  analytical 
underpinning  for  understanding  and  projecting 
change  in  the current situation. 
A  complex  set  of  forces  operate  in the 
global  agricultural-food  system.  Emphasis 
here  is on  the  food  system  of  which  the  fann 
sector  is a  vital  component  but  only  one 
part.  Modern  comnerdal  fanning  requires  a 
sophisticated  infrastructure  to  provide 
financing.  Industrial  inputs,  a  transportation 
system.  assembly  and  storage,  fabricating  and 
~rocessing.  and  distribution  --  Includincl 
~holesali~~.  retailing  and  food  services: 
Moreover,  a  sustainable  comercia1 agriculture 
requires  revenue  in-f lov  to  offset  revenue 
out-flow  for  industrial  inputs.  Interest  on 
borrwed  capital,  taxes  and  living  expenses. 
Financial  stress  on  businesses.  Including 
fanning,  occurs  uhen  revenue  in-flov  is 
insufficient  to meet  debt  obligations,  other 
operating  costs,  and  provide  a  livable  wage 
for labor-management. 
Balance in  the Agricultural  Food  System 
Many  factors  contrlbute  to  the  delicate 
balance  between  food  avallablllty,  food  needs 
and  food  demand.  Populations  throughout  the 
world.  with  concentrations  in  sub-Sahara 
Africa and  other  less developed  areas.  fail to 
meet  food  needs  because  of  inadequate  consumer 
buying  power  and/or  lack  of  local  produced 
foods.  People  heavily  dependent  on 
subsistence  agriculture  are  highly  vulnerable 
to  local  drouaht.  Dest  outbreaks.  etc. 
However.  industriall'zed  regions '  with 
relatively  high  buying  power  seldom  suffer 
frofa  food  shortages because  supply  sources  are 
widespread.  For  example.  the  Southeast  U.S. 
experienced  extreme  drought  and  heat  during 
1986,  but  it did  not  seriously  impact  food 
avallablllty  to  most  of  the  people  in the 
Region.  Ironically.  some  farmers  are 
vulnerable  to  food  shortages  because  of 
inadequate buylng power. 
Weather  --  both good  and  bad -- pests  and 
other  natural  forces  impact  food  supplies. 
Food  needs  are  determined  by  the  size  and 
composition  of  the  population.  However,  food 
needs  equate  to food  availability only uhen it 
is  produced  locally,  or  when  it  can  be 
acquired  in the  market  with  adequate  buying 
power.  Most  of  the  food  available  to 
individual  consumers  in the  industrial  world 
is  acquired  in the market.  This  is true even 
for most  fanners. 
A  shortfall  in food-stuffs  in c~nnercial 
channels  contributes  to hlgh  food  prices  to 
consumers  and  hlgh prices and  revenue  flow to 
producers,  except  for those  subjected  to near 
failures  in  production.  Conversely,  super 
abundance  of  food-stuffs  in  comrcial 
channels  means  lw prices  to consumers,  and 
low  prices  and  revenue  flow  to  producers. 
Revenue  flow  through  the  agricultural-food 
system  is extremely  sensitive  to  relatively 
small  opposite  changes  in product  flow.  An 
over-abundance  of  food-stuf fs  in ccinnercial 
channels,  together  with  weak  world  food 
demand,  caused  revenue  shortfalls  and 
financial  crisis  in U.S.  agriculture  during 
the 1980s. 
Two  enduring  people-created  forces. 
contrlbute  to  the  balance  between  food 
supplies  and  viable  food  markets:  1) 
technological  developments  and  2)  changing 
markets.  The  impact  of  these  forces  on  food 
supplies',  food  markets,  and  revenue  flovs are 
explored  in this  issue  of  the  Journal  of 
Agribusiness. 
Evolving Technologies 
Evolving  technology  is  the  force  that 
undergirds  rising  economic  affluence. 
Advancing  technologies  make  it possible  and 
feasible  to  provide  existing  or  traditional 
goods  and  services  more  efficiently.  1.e..  the 
current  stream  of  goods  and  services  can  be 
provided  with  smaller  inputs  of  labor  and 
other  resources.  Thus.  it  is possible  to 
provide  a  larger  quantlty  andlor  a  more 
sophisticated  array of goods  and  services with 
the  same  or  a  smaller  quantlty  of  inputs. 
Advancing  technologies  provide  new  and  better 
aoods  and  services.  The  wldes~read 
ivallability of  television,  computers,  jei air 
travel,  super  highways  and  super  autonobiles are  examples  of  the  products  of  new  and  more 
efficient technologies. 
The  agricultural-food  system  of  the 
Industrial  world  evolved  into  a  highly 
c~rciallzed  global  system  during the  second 
and  third quarters  of  the  20th  Century.  This 
evolution  is attributed  largely  to advancing 
technologies  and  to  economic  systems  that 
reward  innovation  and  investment.  The 
sequence  of  the  evolution  OF  the  agrlcultural 
food  system  is  well  known.  First  was 
mechanization  followed  by  chemical  fertilizers 
and  pest  control.  Mechanization  in the  food 
system,  such  as  mechanical  refrigeration,  also 
made  possible  the  high  degree  of 
specialization  in  the  agrlcultural-food 
system.  Biological technologies  such  as  hybrid 
seed  have  been  around  a  long  time.  Renewed 
emphasis  has  been  placed  on  blotechnology 
during  the  last quarter  of  the  20th  Century. 
Electronic  technologies  are  also  being 
emphasized  during  the  final  quarter  of  the 
20th Century. 
Advancing  technologles  create  both 
opportunities  and  adjustment  problems.  Much 
emphasis  and  public  resources  are dlrected  to 
science  and  technology,  but  only  limited 
resources  are  directed  to  the  adjustment 
problem  created  by  advancing  science  and 
technolosy.  Much  of  the  human  misery  and 
stresses--  including  financial.  sociai  and 
psychologlcal,  could  be  circumvented  by 
adequate  and  appropriate  attention  to 
adjustment  problems.  People  are all-important 
In the  adjustment  process.  In most  cases, 
people  adversely  affected  by  advancing 
technologies  must  be  retrained  and/or 
relocated.  Impoverishment  and/or  government 
welfare  are  the  only  other  alternatives. 
Nevertheless.  all levels of  government  in the 
United  States  have  neglected  the  seoDle 
adjustment  problem  associated  with  advancing 
technologles. 
Technologies  adopted  by  the  agrlcultural- 
food  system  are  of  two  general  types:  1) 
reducing  management-labor  (people)  and  other 
resource  requirements,  and  2)  Increasing 
output or capacity. 
In  a  rather static market  scenario.  Peoole  .. . 
displaced  from  agricultural  production  need 
assistance  in retraining andlor  relocating  in 
order  to  remain  ~roductivelv  emoloyed. 
Mechanization  and  .  conbnercializatioin  -  of 
agricultural  production  create  employment 
opportunities  in  other  components  of  the 
a~rl~ult~ral-f~~d  system.  Also.  ~eoDle 
displaced  in  agriculture can  and  do contiibute 
to economic  productivity  in other  sectors  of 
the economy. 
Fortunately,  for  society  as  a  whole.  much 
of  the  evolving  technology  in  the 
agrlcultural-food  system  --  particularly  In 
the  farm  ccinponent  --  Is output  or  capacity 
increaslng.  To  the  extent that the  Increasing 
capacity  is  utilized.  it  exerts  downward 
pressure  on  fan  prices,  and  generally 
downward  pressure  on  revenue  flow.  The 
decllnina revenue  flow subseouentlv  results in 
flnanciai  stress,  business  failure.  and 
psychologlcal  and  social stresses. 
The  excess  capacity  problem  can  be 
resolved  only by  relocating people employed  in 
agricultural  production,  and  deactivating  a 
part  of  the  cropland  base.  The  federal 
government  has  traditionally  been  involved  in 
deactivating  part of  the  cropland  base  -- and 
the  animal  inventory  --  using  acreage 
allotments,  marketing  quotas,  PIK 
(payment-in-kind)  ,  and  soil  conservation 
programs.  However.  too little  effort has  been 
directed  to retraining and  relocating  people 
In marginal  agricultural  areas.  Near  full 
employment  of  people  is  essential  to  both 
creating and  distri  buting wealth.  Wvernments 
should  address  the  problems  of  achieving 
equity  amng  people  and  alleviating  social 
stresses  as  well  as  problem of  technical  and 
economic  efficiency. 
Changing  Markets 
Many  factors  contribute  to  changing 
markets  or  changes  in effective  demand  for 
foods  and  kindred  Products.  Changing  food  -  - 
mrkets  subsequently  impact  resource 
requirements  including  labor-  management. 
cropland.  Dasture  land  and  forest:  and  an 
array  of  'mechanical .  enemy  and  chemical 
inputs. 
Markets  for foods  and  kindred products  are 
determined  by  population  size.  needs. 
requirements  and  preferences,  and  buying 
power.  Food  markets  are  further subjected  to 
health  and  nutritional  concerns  of  the 
populace.  Type  of  employnunt,  place  of 
employment  and  time  constraints  also influence 
food  buying  patterns.  Moreover,  numerous 
corporate  enterprises  and  connadlty  groups 
overtly attempt  to change  markets with product 
differentiation.  advertising and  promotion. 
Over  much  of  history.  expanding  capacity 
for  food  production  was  largely  absorbed  by 
increaslng  population.  However,  the  rate of 
increase  in population  in the  United  States 
and  most  of  the  industrial  world  slowed 
substantially  during  the  1970s  and  1980s. 
Although  population  continues  to increase at  a 
substantial  rate in  the under-developed  world. 
the  market  for food  is limited by  inadequate 
income  or  buying  power.  The  food  needs  of 
impoverished  parts of  the world  have  not been 
resolved.  The  global  comnercial  food  market 
is  exDected  to  ex~erience slow  growth  or 
decline,  depending '  on  interpretition  of 
existing data. 
Althouah  consumer  incone  continues  to 
increase ii  the 1980s.  the rate of increase  is 
slowing  and  the  redistribution  of  incm is 
toward-  the  high  end,  which  has  a  negative 
impact  on  the size of  food markets.  Moreover, 
food  aid  programs  are  being  phased  dm  for 
both domestic  and  foreign consumers. Health and  nutrition issues  are alleged to 
influence  food  consumption  patterns.  Hourver. 
this has  not been  well  documented.  Increasing 
demand  for  red  meats  and  dairy  products  has 
been  traditionally  associated  with  rising 
economic  affluence.  However,  thls  trend  has 
been  dampened  or  reversed  by  health  and 
nutrition concerns  and  a  progressively  uneven 
dlstributlon  of  Income.  Production  of  red 
meat  and  dairy  products  require  a  relatively 
large resource  base  in  tern of  pasture  land, 
cropland.  people  pwer,  and  industrial  inputs 
compared  with  plant derived  foods  and  poultry 
products. 
A large proportion of  females  in  the labor 
force  places  greater  emphasis  on  convenience 
In  foods.  Fast  food  service and  foods  adapted 
to  microwave  ~re~aratlon  accollnnrdate  time 
constraints.  ndrkets  for salad vegetables  and 
fresh fruits benefit fron both tlm constraints 
and  health concerns. 
The  extent  to  which  food  markets  are 
changed  by  product  differentiation. 
advertising  and  promation  is  not  well 
documented.  The  inplications  are  that  soft 
drink  (empty  calorie or no  nutritional value) 
markets  have  profited  fron  product 
differentiation.  ~romotion and  advertlsina 
contrary  to  nutrition  and  health  concerns; 
Conversely.  less  intensive  pmtion  of  milk 
and  dairy  products  has  not  been  very 
successful . 
Issues  related  to  evolving  technologies 
and  changing  markets  are  explored  in laore 
detail  in  the  following  papers  in  thls  issue 
of  the  Journal  of  Agribusiness.  Hopefully. 
thls  issue  of  the  Journal  1  promote 
understanding  of  technological  and  market 
forces  that  will  benefit  both  the  actors  in 
the  agricultural  food  system  and  the  policy 
makers  uho  emhasize  technoloaical 
opportunities.  As  a  iesult.  more  emphasi;  may 
also  be  alven to appropriately  addressing  the 
accompanying adjustnent problem. 
Jose~h  C.  Purcell  Is  ~rofessor  and  head  of the 
~epaitment  of  ~grlcuitural  Economics.  6eorgia 
Experiment  Station.  F.  W.  Williams  is 
Associate  Director  for Instruction.  Colleae  of 
Agriculture  and  professor  of  ~griculiural 
Economics.  University of 6eorgla. 

Introduction to the Economics of Changing Markets and Evolving Technologies

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