Agribusiness, International Relations/Trade,

Handy, Charles R.

Seigle, Naaman

English

Research Papers in Economics

International Profile of U.S. Food Processors
by
Charles R, Handy
Economic Research Service
U.S. Department of Agriculture
Naaman Seigle
Economic Research Service
U.S. Department of Agriculture
The rapid internationalization of our food
economy is forcing renewed attention on the
rules affecting the players in the global market
place. These rule changes include the Uruguay
Round GATT negotiations to liberalize trade by
reducing tariff and non-tariff trade barriers;
bilateral agreements to reduce trade barriers;
and the continuing debate over the pros and
cons of direct foreign investment. While every-
one is in favor of improving our international
“competitiveness,” no one really seems to know
how to define this term--let alone how to mea-
sure it. Most equate competitiveness with trade.
But especially in food processing, one must look
at the total “foreign presence” of U.S. firms in
addition to international trade when evaluating
competitiveness.
Strategies to Access
International Markets
There are many alternative strategies
firms can use to enter foreign markets. Some
involve considerable more investment in time,
money, risk, and expertise than do others.
Figure 1 ranks these strategies roughly by de-
gree of investment and involvement required by
U.S. food marketing firms.
The first three strategies relate primarily
to exporting U.S. produced products, while the
last three strategies involve varying degrees of
direct investment. Most firms enter the export
market for the first time by using foreign agents
or brokers. As export sales increase, many
firms take the next step of setting up a separate
export office or division within their U.S. com-
panies. U.S. processors can also decide to pack
under contract for a foreign firm. For example,
several Japanese manufacturers of soda and
fruit drinks are contracting out production of
their Japanese brands to American bottlers.
This is nearly identical in concept to co-pack
operations for private label accounts. Firms
may also choose to have their branded products
produced and marketed in foreign countries
under a licensing agreement with a foreign
firm. While this generally requires no direct
investment in foreign production facilities,
considerable investment is required to identify
appropriate licensees, develop production and
marketing procedures, and establish quality
control safeguards. Joint ventures allow a U.S.
firm to tap into the production, marketing, and
regulatory know-how of a host country firm
without the expense of acquiring a wholly-
owned subsidiary. Finally, a U.S. processor can
acquire or build foreign manufacturing facilities
and operate them as wholly-owned subsidiaries.
In actual practice, a firm can use any one or all
of these strategies at the same time.
Of these six strategies, licensing and joint
ventures are often nearly invisible as far as
being reported in public statistical series. Data
on licensing and joint ventures are generally not
included in trade and investment statistics.
They are also frequently omitted from company
annual reports. In this paper I will focus on
export activities and on direct foreign invest-
ment.
Processed Food Exports
The majority of U.S. agricultural exports
comes from raw or bulk agricultural products.
In FY1987, U.S. agricultural exports totaled
$28.6 billion. Of this amount, $11.7 billion or
40 percent came from processed products while
unprocessed agricultural products accounted for
Journal of Food Distribution Research February 89/page 560 percent. Recently, renewed emphasis has
been placed on increasing exports of processed
food products through programs to counter
unfair foreign trade practices, The Export
Enhancement Program has resulted in additional
sales of wheat flour, rice, frozen poultry, poul-
try feed, table eggs, and vegetable oil. The
Targeted Export Assistance (TEA) Program
provides export assistance by reimbursing eligi-
ble participants a portion of their foreign prom-
otion expenses. Even with these efforts, the
proportion of U.S. agricultural exports that are
unprocessed has remained stable at about 60
percent.
Figure 1
Alternative Strategies
To Access Foreign Markets
+
The U.S. food processing industry is dom-
estic-market oriented. Exports in 1987
accounted for less than 4 percent of domestic
sales. Exports as a percent of domestic sales
peaked in 1980-81 at 5 percent, declined
gradually to 3.5 percent in 1985, then slowly
increased to about 4 percent. We also import a
relatively small and stable share of our pro-
cessed food supPly. Since 1972, we have im-
ported between 3.5 percent and 4.5 percent of
our processed food.
While processed food imports and exports
account for a relatively small share of domestic
production, in absolute terms the United States
is the world’s largest importer and exporter of
processed food. In 1987, U.S. processed food
exports totaled $12.5 billion while imports
totaled $18.9 billion.
One lesson we can draw from this is that
trade in processed food is not as sensitive to
macro economic variables, such as exchange
rates, as is trade in bulk agricultural com-
modities (Figure 2). While U.S. exports of pro-
cessed foods peaked in 1981 and then declined
through 1985 as the dollar rose, the decline was
relatively mild (2.8 percent) compared to the
decline for all U.S. agricultural exports (49.3
percent).
We now turn to the composition of trade
within the processed food sector. Which in-
dustries account for the bulk of U.S. exports
and have they changed over time? Even with-
in the food processing sector, the majority of
U.S. exports are relatively low value-added
producer goods rather than packaged consumer
foods. Of the 47 industries that make up our
food processing sector, only 4 have exports that
exceed $1 billion annually. The largest is meat
packing which exported $2.7 billion in 1987.
But producer goods such as cattle hides, tallow,
and lard account for nearly 50 percent of these
exports, while beef products account for about
35 percent. The second largest exporter is the
soybean oil mill industry with 1987 exports of
$1.6 billion. The fresh or frozen fish and sea-
food industry exported $1.5 billion in 1987.
The final industry with exports of $1 billion or
more is wet corn milling. Within the grain mill
products industry group, high value-added in-
dustries such as cereal breakfast foods had ex-
ports of only$31 million which is only one-half
of one percent of domestic sales, Thus, while
there are opportunities to increase exports of
high value-added products, these represent a
relatively small share of total agricultural
exports.
February 89/page 6 Journal of Food Distribution ResearchFirm-1evel Analysis Foreign Investment Profile
The Economic Research Service is cur-
rently studying the international operations of
about 60 of the largest U.S. food processing
firms. We obtained dfita on total company sales
of processed food, sales from U.S. operations,
sales from foreign subsidiaries, exports from
U.S. operations, and total number of plants
operated in the United States and in foreign
countries. For the 57 firms in our sample, food
processing sales in 1986-87 ranged from over
$10 billion to $182 million. Total processed
food sales for these firms came to $147 billion
in 1986-87. This represents 48 percent of all
U.S. food processing sales.
Export Profile
It is interesting to examine the extent to
which these larger than average food processing
firms in our sample are engaged in export
activities. Surprisingly, even our largest food
marketing firms are not, in general, major ex-
porters of high value-added food products. In
fact, these firms on average exported a lower
percentage of their domestic production than
the average for all U.S. food processing plants.
From their total U.S. sales of $147 billion, these
57 firms exported only $3.3 billion which
amounts to 2.8 percent of their sales. By com-
parison, all U.S. food processing establishments
exported an average of 4 percent of their sales
according to Census Bureau data.
In looking at individual companies, only
two of the 57 had exports that exceeded 15
percent of their domestic processed food sales.
One company, Archer Daniels Midland, exports
large quantities of feed and other bulk grain
mill products. The other firm, Riceland, is a
cooperative and a major exporter of rice and
other grain products. Only three additional
companies had exports that exceeded 5 percent
of their domestic sales.
At the other end of the scale, four firms
reported no export sales at all. Included are
some very large processors with internationally
recognized brand names. Sixteen firms had
exports of less than one percent of sales, while
another twenty-one firms in our study exported
only 1 to 3 percent of their domestic sales. The
final thirteen firms exported between 3.1 and 7
percent of their domestic production. Export
statistics, by themselves, greatly understate the
foreign “presence” of U.S. food processors.
Rather than rely on exports, it appears
that large food processors use foreign invest-
ment as the major strategy for gaining sales in
international markets. Indeed, 36 of the 57
firms in our study owned food processing plants
in foreign countries (Table 1). These 57 firms
operated a total of 2,503 processing plants--74
percent located in the United States and 26
percent located in foreign countries.
As examples, RJR Nabisco operates 170
food processing plants, 47 in foreign countries;
Campbell Soup has 87 plants, 28 in foreign
countries; CPC International has 112 plants, 83
in foreign countries; Heinz has 63 plants, 38 in
foreign countries; Quaker Oats has 65 plants, 34
are foreign; Kellogg Co. has 37 plants, 15 are
foreign; and Ralston Purina has 123 plants, with
66 in foreign countries.
Sales from these foreign plants accounted
for 20 percent of total processed food sales for
the 57 firms. Thus, large U.S. food processors
receive 20 percent of their sales from foreign
subsidiaries while exports account for less than
3 percent of sales.
Foreign subsidiaries account for a sub-
stantial share of sales for many U.S. food pro-
cessors (Table 2). Two companies, CPC Inter-
national and Coca-Cola, Inc., receive over 50
percent of their processed food sales from
foreign operations.
Table 2
Food Processing Sales
From Foreign Subsidiaries
$1 billion or more
(10 firms)
Philip Morris (G. F.) Heinz
Coca Cola Sara Lee
CPC International United Brands
RJR Nabisco Kellogg’s
Kraft Quaker Oats
$500 million or more
(7 firms)
Pepsico Hershey’s
Ralston Purina Pillsbury
Castle & Cooke Borden
Campbell Soup
Journal of Food Distribution Research February 89/page 7Table 1
U.S. and Foreign Food Processing Plants
Owned by U.S. Food Processing Firms
Total Percent
Firms Plants Us. Foreijzn Foreim
---------- Number ---------- Percent
CPC International 112
Ralston Purina 123
RJR/Nabisco 170
Kraft 96
Philip Morris (G. F.) 103
Heinz 63
Quaker Oats 65
Campbell Soup 87
Borden 153
Pepsico 115
ConAgra 150
International Multifoods 45
Sara Lee 67
McCormick 52
Coca Cola 63
Kellogg’s 37
Pillsbury 77
Staley Continental 56
General Mills 47
Castle & Cooke 47
Wm. Wrigley 17
Archer Daniels Midland 122
Anheuser Busch 86
Hershey’s 20
Procter & Gamble 23
IC Industries (Pet) 50
United Brands 25
Gerber Foods 6
Brown Forman
Curtice-Burns 2;
Hormel 23
Wilson Foods 12
Am. Home Products
Flowers 3;
Clorox 4
American Brands 14
Source Company annual reports and form 1O-K reports.
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Journal of Food Distribution Research February 89/page 9An additional nine firms received be-
tween 30 and 50 percent of their sales from
their foreign subsidiaries. And ten firms had
between 15 and 29 percent of their sales come
from foreign subsidiaries.
But foreign investment is by no means
universal for these large firms. Twenty-one of
the 57 firms reported no sales from foreign
operations. While most of these firms did en-
gage in exports, four firms said they had no
i export sales as we 1 as no sales from foreign
operations.
Sales from foreign subsidiaries tend to
understate the full international “presence” of
many U.S. food processors. Most U.S. food
processors do not include licensing and joint
venture operations in reporting their foreign
sales. For example, many U.S. brewers, includ-
ing Miller Brewing Company and Coors, license
Canadian firms to produce their brands in
Canada. Many firms prefer to license foreign
firms to produce specific branded products
since they can avoid the expense of establishing
their own foreign subsidiary. U.S. food pro-
cessors are increasingly developing joint ven-
tures- -especially in centrally planned countries.
Both Heinz and RJR/Nabisco have recently
established joint venture food processing opera-
tions in China.
Can We Expand Value-Added Trade?
While large U.S. food processing firms
tend to be internationalists, most are not major
exporters --especiall y of value-added consumer
food products. What factors influence U.S.
firms to produce finished consumer food prod-
ucts in foreign plants rather than export from
U.S. plants? One obvious answer is that setting
up production facilities in foreign countries
avoids tariff and most non-tariff trade barriers.
But even where trade barriers are minor, many
firms apparently prefer producing in the
foreign country rather than exporting. Com-
panies give several reasons.
One is to reduce transportation costs.
This is especially important for products where
consumer packaging adds considerable weight.
Second, U.S. firms find it easier to deal with
local governments and regulatory agencies when
the product is produced in the host country.
Third, for consumer value-added products, it is
easier to keep abreast of local tastes and oppor-
tunities for new product development or refor-
mulations when products are produced in the
foreign country. Fourth, some firms prefer to
acquire established brands in foreign countries
and use those facilities as a base for further
expansion. Fifth, producing a product in a
foreign plant may improve access to local food
distribution firms and facilitate a variety of
marketing and promotional activities involved in
marketing a branded consumer product. Final-
ly, a firm that initially exports to a market may
decide to switch to foreign production once the
export market becomes large enough. For
example, CPC International initially exported
Heilman mayonnaise to Chile, But in 1986,
CPC opened a new plant in Chile to manufac-
ture mayonnaise and other products thus elimi-
nating a major export market. The paradox
here is that the very success and growth of an
export market led to its elimination as it became
more profitable for the firm to switch from
exporting to producing the product in its for-
eign subsidiary, This is another example of how
foreign trade data can be a misleading measure
of “competitiveness.”
While many of the largest U.S. processors
are not major exporters, hundreds of medium
and smaller size processors have opportunities to
identify and develop export markets for special-
ty products and for market niches too small to
interest the largest firms, Sun-Diamond Grow-
ers, Tri/Valley Growers, Welsh Foods,
Smucker’s, and Thorn Apple Valley are ex-
amples of medium size firms that have aggres-
sively developed export markets.
Since 1986, there have been significant
increases in our traditionally strong export mar-
kets for grain mill products, soybean oil mills,
and fish and seafood. Exports have also in-
creased significantly for red meats, poultry,
processed fruits and vegetables, confectionery
products, and beverages. Current negotiations
to reduce trade barriers could be especially
important for increasing trade in this latter
group of industries. Negotiations with Taiwan,
Japan, and South Korea has further opened
these markets to U.S. beer and wine exports
which increased 40 percent and 72 percent re-
spective y in 1987 over 1986.
U.S. general line grocery wholesalers are
also becoming more active in exporting pro-
cessed food products. In a survey conducted by
the National American Wholesale Grocers
Association in 1987, leading grocery wholesalers
such as Super Valu and Fleming reported ex-
ports averaging about $18 million per whole-
saler. Wholesalers have an advantage in that
they can combine orders for several brands
from different processors into a single shipment
to foreign customers.
February 89/page 10 Journal of Food Distribution ResearchProspects for the Future References
For a variety of production cost and mar-
keting reasons, the majority of U.S. food pro-
cessing exports are in lower value-added and
bulk semi-finished products such as grain mill
products, cattle hides, bulk fats and oils, and
fresh or frozen fish and seafood. This is likely
to continue.
However, exports of high value-added
products are increasing and are likely to con-
tinue to expand. Many smaller and medium-
sized processors have developed significant
export markets. Wholesalers are also expanding
their exports of processed products. But this
must be kept in perspective. Processed food
exports account for less than 4 percent of total
industry shipments.
Many of the largest U.S. food processors
report very modest export sales of finished
consumer food products. They generally do not
expect large growth in their exports of these
products. Rather, these firms continue to ex-
pand aggressively in foreign markets by in-
creasing their investment in foreign plants
and/or expanding licensing arrangements with
foreign firms to produce and distribute their
branded products in foreign markets. Large
food processors will continue to acquire or build
foreign food processing plants as a major stra-
tegy for expanding sales.
While the reasons for producing in foreign
markets are largely marketing related, U.S.
processors are aggressively seeking to improve
productivity in their foreign subsidiaries and
become the low cost producer in their host
country. The scheduled removal of all internal
trade barriers in the European Community in
1992 provides opportunities to obtain further
economies of scale in European based plants.
Journal of Food Distribution Research
U.S. Department of Agriculture, Economic
Research Service, Foreign Agricultural
Trade of the United States, various issues.
U.S. Department of Agriculture, Economic
Research Service, internal compilation of
data from annual reports and SEC 1O-K
reports, supplemented by data supplied by
individual companies,
U.S. Department of Commerce, Census of Man-
ufacturers, Annual Survey of
Manufacturers, 1986.
U.S. Department of Commerce, 1988 U.S. In-
dustrial Outlook, January, 1988.
February 89/page 11

INTERNATIONAL PROFILE OF U.S. FOOD PROCESSORS

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