Federal Reserve District, 7th ; Food industry and trade

Michael A. Singer

English

Research Papers in Economics

ESSAYS ON ISSUES THE FEDERAL RESERVE BANK SEPTEMBER 1996
OF CHICAGO NUMBER 109
Chicago Fed Letter
The performance of Seventh
District food processing
The performance of the U.S. rural econ-
omy has varied significantly from that of
urban areas in recent years.  After grow-
ing at a rate similar to urban areas in
the 1970s, rural America fell behind in
the 1980s.  However, a look at some
broad measures of population and in-
come growth suggests the rural econo-
my is picking up steam in the current
decade.  In general, recent gains for
rural areas have closely paralleled, and
in some cases even exceeded, those of
urban areas.  In particular, rural popu-
lation growth has experienced a re-
markable turnaround in this decade.
The changing fortunes of rural areas
naturally raise questions about the fac-
tors that have prompted the recent im-
provement.  For example, how do the
changes in agriculture, manufacturing,
and other sectors affect the economic
welfare of rural residents?  And more
importantly, can the recent improve-
ment in rural economic performance
be sustained?  The answers to these
questions will help rural residents and
policymakers cope with change and find
prosperity in the future.
To better understand the challenges
facing rural areas, the Federal Reserve
Bank of Chicago hosted a conference
earlier this year to evaluate the recent
performance and future prospects of
the Midwest rural economy.  The con-
ference was part of a year-long project
examining different facets of econom-
ic performance in the Midwest.  The
topics discussed at the conference on
the rural economy included population
trends in rural and urban areas; the
quality of rural education; develop-
ments in rural service industries (pro-
ducer, health care, retirement, and
recreation); the ongoing structural
change occurring in production agri-
culture; and trends in rural manufac-
turing.  In addition, the food processing
industry was closely examined during
the workshop due to its strong ties to
the agricultural sector and rural areas.
In this Chicago Fed Letter, we describe the
recent performance of food processing
firms in the states of the Seventh Feder-
al Reserve District (Illinois, Indiana,
Iowa, Michigan, and Wisconsin) and
discuss some of the immediate chal-
lenges facing these firms.
Food processors make an important
contribution to the economy—at both
the District and national levels—in a
variety of ways.  As perhaps the princi-
pal link in the food marketing chain,
food processors typically undertake the
initial transformation of raw agricul-
tural commodities to high-quality food
products.  They are an especially impor-
tant part of the rural landscape, with a
greater tendency to locate plants and
employment in rural areas than other
manufacturers.  Approximately 40%
of food manufacturing plants are in
rural areas, compared with less than
23% for other types of  manufactur-
ing.  Food processing firms also play
a major role in the District’s industrial
sector.  Among the 20 major manufac-
turing groups, food processing in Dis-
trict states ranks second in sales and
value added and fifth in employment.1
In international trade, the gains in con-
sumer food exports have been much
more dependable in recent years than
the foreign sales of either intermedi-
ate-value or bulk agricultural products,
which tend to suffer much wider year-
to-year variations.  Furthermore, long-
term forecasts released by the U.S.
Department of Agriculture predict
more rapid gains for manufactured
food exports relative to bulk commod-
ities well into the next century, despite
the recent boom in commodity exports.
Finally, some analysts have suggest-
ed that formal agricultural and food
policy goals be changed to put greater
emphasis on international competitive-
ness, improved nutrition, increased ru-
ral economic opportunity, and natural
resource conservation.2  Food proces-
sors would naturally play an important
1.  Seventh District’s top 15 food processing industries
Value added % of all District
Rank ($ billion) food processing
Industry 1982 1992 1982 1992 1982 1992
Breakfast foods 3 1 1.26 3.47 6.9 10.6
Confectionery 2 2 1.47 2.49 8.0 7.6
Wet corn milling 5 3 0.90 2.39 4.9 7.3
Cheese 8 4 0.79 2.19 4.3 6.7
Meat processing 7 5 0.80 1.85 4.4 5.7
Meat packing 1 6 1.56 1.74 8.5 5.3
Processed milk 9 7 0.78 1.69 4.3 5.2
Soft drinks 6 8 0.85 1.65 4.6 5.1
Bread 4 9 1.11 1.48 6.1 4.5
Cookies and crackers 15 10 0.52 1.21 2.8 3.7
Canned fruits & vegetables 17 11 0.50 0.94 2.7 2.9
Flavorings 16 12 0.52 0.90 2.8 2.8
Fluid milk 14 13 0.55 0.89 3.0 2.7
Frozen specialties 18 14 0.39 0.86 2.1 2.6
Animal feeds 13 15 0.58 0.74 3.1 2.3
Top 15 12.58 24.48 68.7 74.9
All food processing
District states 18.31 32.69 100 100
U.S. 88.42 156.84
Source:  U.S. Department of Commerce.Value
Employment added
(----percent change----)
High performers
Flour mixes 98 167
Poultry processing 83 249
Cheese 31 178
Ice cream 14 224
Frozen fruits and
vegetables 33 97
Frozen specialties 18 119
Meat processing 32 131
Processed milk 14 116
Low performers
Spirits –39 –5
Beer –61 –9
Dried fruits and
vegetables –39 –9
Pasta –37  –12
Cooking oils –37 –29
Pet food –49 –35
Pickles and sauces –15 17
Flour –18 –2
Beet sugar –27 21
Frozen fish –71 24
All food processing
District states –5 78
U.S. 1 77
Source:  Author’s calculations based on data
from U.S. Department of Commerce.
role in the implementation of these
types of policy goals.
An important characteristic of the food
processing industry in District states is
its ties to the region’s production agri-
culture.  This is evident from figure 1,
which lists the major food processing
industries in the region in terms of
value added.  The linkages of many
of these industries—such as corn mill-
ing, cheese production, and meat
packing—to the District’s production
agriculture are quite obvious.  Some
are not so clear.  For example, confec-
tionery and soft drinks are large-scale
users of corn sweeteners, a product of
corn milling.  Frozen specialties are
heavy users of meat and vegetable
products in frozen dinners and meat
and cheese in frozen pizzas.  Although
figure 1 lists only 15 of the nearly 50 in-
dustries in the food processing sector,
these 15 industries account for nearly
three-quarters of the economic activi-
ty that stems from food processing in
District states.  Given the role of District
agriculture in livestock production
(District states account for about 45%
of hogs on farms and about 10% of
beef cattle in the U.S.), it is noteworthy
that meat packing’s ranking dropped
from first to sixth during the 1982–92
period.  The lack of growth in meat
packing relative to other industries re-
flects the District’s declining share of
beef production since the early 1970s.
However, this development was some-
what offset by growth in meat process-
ing, an activity that adds extra value to
meat products at the processor level in
response to the desire shown by con-
sumers for greater convenience and
variety at the retail level.
Given the diversity of food processors
in District states, and given that growth
trends in economic activity and em-
ployment are important gauges of a
region’s economic well-being, which
food processing industries were the
best performers for the District in
recent years?  Which showed the least
staying power?  We examined the val-
ue added and employment growth for
these industries from 1982–92 and cat-
egorized them as follows: If an industry
ranked in the top 15 both in terms of
value-added growth and in terms of
employment growth, it was termed a
high performer; those that ranked in the
bottom 15 in both categories were
subject to bacterial contamination.
It is much more efficient and effective
to conduct processing activities near
areas of milk production and then
ship the final products to demand
points.  Supply-oriented food indus-
tries predominate in District states
and are a direct reflection of the re-
gion’s strong production agriculture
base.  These industries account for
half the employment and value added
that stem from the region’s food pro-
cessing activities.
In comparison, a demand-oriented
industry is more inclined to locate
manufacturing plants near popula-
tion centers (or in the case of livestock
feeds, areas of livestock concentration),
because distribution costs of the final
product are relatively large.  Examples
include bread, soft drinks, and pasta.
In the case of bread manufacturing,
the output is rather bulky relative to
its weight and freshness may also be
an issue.  Each District state has a sig-
nificant bread manufacturing indus-
try, yet none of these states is a major
producer of wheat.  Furthermore, the
share of bread production held by each
state tends to parallel its share of Dis-
trict population.  Demand-type firms
account for 24% of employment and a
somewhat smaller share of value added
among all District food processors.
In contrast, footloose industries are less
likely to be constrained by transporta-
tion costs.  This group also includes
those industries not easily categorized
as supply- or demand-oriented, such
as frozen specialties, candy and con-
fectionery, and flavorings.  Firms in
these industries put relatively more
emphasis on factors such as taxes, util-
ity costs, infrastructure, and the avail-
ability and cost of labor and services
when making plant location decisions.
This implies there would be a bias
toward locating or expanding in areas
that are favorable to manufacturing
firms in general.  Given the strong
presence of other manufacturers in
District states, it seems the region
would be an attractive location for
food industries that are not closely tied
to input supply areas or demand cen-
ters.  Footloose firms account for one-
fifth of food processing employment in
District states but a larger share (about
one-third) of value added.
2.  High/low performers, 1982–92
designated low performers (see figure
2).  Of the eight industries classified
as high performers, five are relatively
large, together accounting for over
one-fifth of the value added by District
food processors in 1992.  These are
poultry processing, meat processing,
cheese production, processed milk,
and frozen specialties.  These indus-
tries not only registered significant
gains from 1982–92, but did so from
relatively large initial bases.  In com-
parison, none of the low performers
were among the District’s major food
processing industries.
Another useful way to examine food
processors is by their tendency to locate
production plants near sources of in-
put supplies or demand points.  A sup-
ply-oriented firm or industry tends to
locate near the source of raw agricul-
tural inputs, most likely because those
commodities are perishable and/or
expensive to transport.  Cheese manu-
facturing, wet corn milling, soybean
processing, and meat packing are
among the industries included in this
category.  For example, the primary
input in cheese production is milk,
which is bulky, costly to move, andcost component.  Using these variables
as predictors suggests that food pro-
cessing growth in District states will
tend to lag overall food processing
growth in the U.S. through the turn
of the century.  This is because annual
wages paid by District processors are
somewhat higher than the U.S. aver-
age, while the region’s population
growth is expected to lag the rest of
the nation.  However, this approach
may underestimate future growth for
District food processors, because it
fails to account fully for the recent
expansion of food product sales in
foreign markets.
Conclusion
In addition to wage and population
differentials, District food processors
face other challenges that will affect
their performance and their ability to
provide jobs for District and rural
residents.  These challenges include
declining grain stocks, changes in
farm policy, and structural changes
in regional livestock production.  For
example, the greatest gains in hog
production in recent years have been
concentrated in states outside the
Midwest.  If this trend continues, the
Midwest could lose its dominance in
pork processing, similar to its loss of
beef processing in the 1970s.  A simi-
lar situation exists for milk processing
and cheese production because the
Midwest’s share of milk production
has declined.
Furthermore, the recent shifts in farm
policy will result in a more uncertain
environment for food processors.
Over the past decade, farm policy has
steadily become more market-orient-
ed.  Partly as a result, domestic grain
stocks have declined.  In addition, the
1996 farm bill provided for the separa-
tion of planting decisions and program
payments, raising the potential for
larger year-to-year swings in the acres
planted to individual crops such as
corn, wheat, and soybeans.  Conse-
quently, food processors can expect
to face greater variability in available
grain supplies and in prices.  The re-
cent increase in grain prices—resulting
from a moderate production decline
and vigorous demand—may provide a
glimpse of a more volatile future.  For
example, ethanol producers recently
announced production cutbacks due
to high corn prices and smaller avail-
able corn supplies.
Finally, research by analysts at the
U.S. Department of Agriculture sug-
gests that both capital expenditures
and productivity gains of rural manu-
facturers tend to lag those of firms in
urban areas.  This would tend to limit
future gains in output and wages paid
by rural firms relative to urban firms.
Food processors, with their strong ru-
ral ties, are more likely to fit this pro-
file than other manufacturers.  How
they deal with these challenges will
have important implications for jobs
and wages in rural communities.
—Michael A. Singer
Agricultural economist
IL IN IA MI WI U.S.
0.0
0.8
1.6
2.4
3.2
annual percent change in value of shipments
In general, supply-oriented food indus-
tries were the best performers among
all District food processors over the de-
cade to 1992.  Both employment and
value added made solid gains.  Firms in
the footloose industries nearly matched
this performance in terms of value added,
but registered an employment decline.
However, those enterprises in demand-
oriented industries lost ground in both
value added and employment during
the same period.  The likely cause of
this relatively low performance is the
link between demand-oriented firms
and the local/regional population.
Population growth in District states
was less than stellar from 1982–92,
about 3% (compared with 10% for
the entire U.S.), which encouraged
only modest growth in nominal sales
for the demand-oriented group.
Furthermore, transportation costs
may constrain these firms from
competing for rising demand in
distant markets.
From 1982–92, the value added for all
food processors in District states ex-
panded at a rate similar to that for the
U.S. as a whole.  But what is the poten-
tial for future growth in District food
processing relative to other geographi-
cal areas?  To shed some light on this
question, we used a simple statistical
model to predict regional sales growth.
The results for District states are shown
in figure 3.  Previous research indicates
that a significant portion of the varia-
tion in growth across regions stems
from differences in population growth
and annual wages.  Population change
represents an important demand indi-
cator, while labor is a significant unit
3. Predicted growth, 1992–2002
1Value added represents the value of pro-
duction less materials cost.  It is useful as a
measure of economic activity because it
avoids the double counting that may occur
when adding together the sales of different
industries.  For example, an end product of
wet corn milling—high fructose corn syr-
up—is also a production input for soft
drink manufacturing.
2See Drabenstott, Mark, and Alan Barkema,
“A new vision for agricultural policy,” Eco-
nomic Review, Federal Reserve Bank of Kan-
sas City, Third Quarter, 1995, pp. 63–78.
Michael H. Moskow, President; William C. Hunter,
Senior Vice President and Director of Research;
Douglas Evanoff, Assistant Vice President, financial
studies; Charles Evans, Assistant Vice President,
macroeconomic policy research; Daniel Sullivan,
Assistant Vice President, microeconomic policy research;
William Testa, Assistant Vice President, regional
programs;  Anne Weaver, Manager, administration;
Helen O’D. Koshy, Editor.
Chicago Fed Letter is published monthly by the
Research Department of the Federal Reserve
Bank of Chicago.  The views expressed are
the authors’ and are not necessarily those of
the Federal Reserve Bank of Chicago or the
Federal Reserve System.  Articles may be
reprinted if the source is credited and the
Research Department is provided with copies
of the reprints.
Chicago Fed Letter is available without charge
from the Public Information Center, Federal
Reserve Bank of Chicago, P.O. Box 834,
Chicago, Illinois,  60690-0834, 312-322-5111.
Chicago Fed Letter is also available on the World
Wide Web at http://www.frbchi.org.
ISSN 0895-01643.0
4.5
6.0
7.5
Motor vehicle production (millions, seasonally adj. annual rate)
Cars
Light
trucks
Motor vehicle production
(millions, seasonally adj. annual rate)
July Month ago Year ago
Cars 7.0 6.7 6.2
4.6 5.4 6.0 Light trucks
1993 1995 1996
Manufacturing output indexes
(1987=100)
June Month ago Year ago
MMI 148.1 147.4 140.8
123.3 126.9 127.6 IP
Purchasing managers’ surveys:
net % reporting production growth
July Month ago Year ago
MW 50.9 60.7 46.4
52.1 55.4 52.7 U.S.
1994
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Tracking Midwest manufacturing activity
Sources: The Midwest Manufacturing Index (MMI) is
a composite index of 16 industries, based on monthly
hours worked and kilowatt hours.   IP represents the
Federal Reserve Board’s industrial production
index for the U.S. manufacturing sector.  Autos
and light trucks are measured in annualized units,
using seasonal adjustments developed by the Board.
The purchasing managers’ survey data for the
Midwest are weighted averages of the seasonally
adjusted production components from the Chicago,
Detroit, and Milwaukee Purchasing Managers’
Association surveys, with assistance from Bishop
Associates, Comerica, and the University of
Wisconsin–Milwaukee.
Midwest manufacturing activity continued to be buoyed by auto production in
July, although some slowing in the overall pace of manufacturing activity was
apparent.  Light vehicle (cars and light trucks) production continued to expand,
reaching 13.0 million units in July from 12.1 million units in June.  Auto producers
have been attempting to rebuild stock, accounting for the continued strength in
assemblies, but some inventory building as a hedge against a strike in September
(when the current UAW contract expires) is also possible.
The composite purchasing managers’ index for production in the Midwest
dropped sharply in July, but still remained above the 50 mark (the level at which
activity is flat).  The national purchasing managers’ index also slowed from its
June pace, but signaled a somewhat stronger expansion than the Midwest index
for the first time since July 1995.

The performance of Seventh District food processing

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The performance of Seventh District food processing

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