Myers, Lester H.

English

Research Papers in Economics

SOUTHERN JOURNAL OF AGRICULTURAL  ECONOMICS  JULY,  1989
ECONOMIC FORCES INFLUENCING VALUE-ADDED  FOOD
INDUSTRIES:  IMPLICATIONS FOR SOUTHERN
AGRICULTURE:  DISCUSSION
Lester H.  Myers
The  Christy  and  Conner  paper  entitled  domestic  processed  food  consumption.  Two
"Economic  Implications  Influencing  Value-  facts are important: (1)  the population growth
Added  Food  Industries:  Implications  for  rate is less than 1 percent per year, and (2) the
Southern  Agriculture"  now  joins  other  sales of higher valued processed foods tend to
recent  papers  (Polopolus,  Myers)  in  sug-  respond more  to increases  in income  than do
gesting that (a) the food marketing  sector  is  sales of less processed,  lower value products.
relatively more important in generating value  Food  manufacturers  and  distributors  are
for the U.S. economy than is the agricultural  keenly  aware  that  relying  on  population
production  sector  and  (b)  support  for  food  growth  alone  will  not  generate  the  kind  of
marketing research  should be expanded.  sales  growth  needed  to  attract  shareholder
Christy  and  Conner  identify  three  capital. However, different firms and industry
categories  of  forces  influencing  the  food  segments  react  with  different  strategies
manufacturing  sector:  economic,  techno-  designed to increase  growth rates.
logical, and institutional.  Economic forces are  One  strategy attempts  to  capitalize  on the
defined to be domestic demand, market struc-  relatively  high income elasticities for processed,
ture  and  organization,  and international  fac-  value-added  foods.  The  response  is an  expan-
tors.  Technological  change  is  defined  as any  sion of products with embodied services (e.g.,
change  which  alters  the  input  mix  with  the  pre-cooking, microwave ready packages, etc.).
potential  to  alter  comparative  regional  cost  Another  result  is increased  segmentation  of
advantages.  Finally,  institutional  forces  in-  the  market  through  product  proliferation
elude  national,  sectorial,  and  state  public  designed to cater to specific consumer groups
policies and, presumably, the effects of macro  (i.e.,  a  type  of  price  discrimination).  This
economic  conditions  resulting  from  such  strategy  is  also  consistent  with  changes  in
policies,  lifestyles which result in increased demand for
The  second half of the  paper is devoted  to  convenience (e.g., working wives, two-income-
the identification of regional growth patterns  earner  households,  and  single-parent  house-
of U.S. food manufacturing industries and to a  holds).
simple  model  for projecting  regional  growth  In an effort  to evaluate whether or not the
rates in value  of shipments by food manufac-  food marketing  industries have  been success-
turers.  ful  in achieving  growth through the  addition
The  first  half  of  the  paper  identifies  the  of  value-added  activities,  I  constructed  a
authors'  ideas  about  various  forces  shaping  "base"  growth  rate  of  value  added  for  the
food manufacturing  industries.  My comments  1972  through  1987  period  in  five-year  in-
will  attempt  to  elaborate  on  some  of  the  crements.  The  "base"  growth  is the  percent
general  forces  identified  in  the  Christy  and  increase  in population plus the product of the
Conner paper.  percent increase in real, per capita income and
The  authors'  correctly  identify  population  an  average  income elasticity  for food  of 0.18.
growth  and  income  growth  as  two  major  The hypothesis  is that actual growth in value
determinants  of long-term  growth  rates  for  added  (1977  dollars)  by  sector  should  be  at
Lester H. Myers is  Chief,  Food Marketing and  Consumption  Branch,  Economic Research  Service,  USDA.
Opinions  expressed are the  author's  and do  not necessarily represent  official  U.S. Government policy  or views.
Invited discussion  presented  at  the annual  meeting  of the Southern  Agricultural  Economics  Association,  Nashville,  Tennessee,
February 6-8,  1989. Invited  discussions are routinely published in the July SJAE without editorial council review but with review of the
copy editor (as per Executive Committee action  June 25,  1982).
Copyright  1989, Southern  Agricultural  Economics Association.
23least as good as the base. If actual growth ex-  achieving  accelerated  industry  growth
ceeds  the  base,  it  suggests  that  industry  through  value-added  activities,  it would  ap-
strategies  to  achieve  higher  growth  rates  pear  that,  except  for  the  food  service  in-
through  more  value-added  activities  have  dustries,  the  food marketing  sector  has  not
been successful.  Table  1 gives the results.  been able to exploit that potential to a signifi-
This  analysis  suggests  that  the  retailing  /  cant  degree.  The  analysis  suggests  that  the
wholesaling and processing sub-sectors  of the  current  emphasis  toward  more  value-added
food marketing  sector have only been  able to  activities  within  the  food  marketing  sector
achieve  average,  real  value-added  growth  might have limited effect on providing oppor-
rates  of  0.2  percent  to  0.3 percent  per year  tunities for new firms, increased employment,
above  expectations  based  on  population  and  and increased  farm  income.  At the least  we
income growth  over the  1972  to  1987 period.  need more research into the economic impacts
The eating and drinking sub-sector expanded  of value-added  activities.
the  most  relative  to  the  base,  an  annual  The Christy and  Conner paper  does not of-
average  of nearly  1.5 percent  over the base.  fer  much  discussion  of the  influence  of the
The  difference  between  value-added  growth  growth  in  the  food  service  industry  on  the
rates for the food retailing and the eating and  economics  of the food marketing  sector.  The
drinking sub-sectors suggests that if there is a  share of total food expenditures spent on food
positive effect of the well-publicized trends in  consumed at food service establishments is in-
food retailing to offer more values-added  ser-  creasing about one percentage point per year,
vices  (in-store delicatessens,  salad bars, etc.),  reaching 45 percent in 1987 (Putnam, p.  107).
it may be in slowing  down the erosion of the  Despite its importance,  we  know little about
food retailing market share for the consumer's  how  this  industry  functions  and  interfaces
food  dollar  to  the  food  service  sub-sector  with  other  segments  within  the  U.S.  food
rather  than  achieving  substantial  real value-  system. I think there are two important areas
added growth.  of needed inquiry.
The  first  is  the  role  of  food  service  as  a
TABLE  1. GROWTH  IN  FOOD MARKETING  VALUE  ADDED:  v  f  s  f 
1977 DOLLARS  vehicle  for small food processors  to enter the
market.  My  impression  is  that  it  has  been
Sector  72-77  77-82  82-87  easier  for  small  processors  to  enter  the  in-
Percent  dustry via selling to the food service industry
Basea  6.4  5.1  7.6  and their distributors than through marketing
Processing  to retail food stores because  of less  need  for
Actual  8.2  4.7  10.9  brand identification  and because  selling activ-
Differenceb  1.8  -0.4  3.3  ity  could  be  concentrated  on  relatively  few
Retailing &  Wholesaling  buyers.  However,  recent  reports  that  some
Actual  7.5  4.4  10.5  distributors  are beginning  to  charge  fees  to
Difference  ;  1.1  -0.7  2.9  handle  new  products,  similar  to  "slotting"
Eating &  Drinking  fees  charged  by retailers,  suggest that  entry
Actual  195.  8.9  1698  into  the  institutional  sales  market  may  be
Difference  9.3  3.8  9.2
becoming  more difficult.
Total  Food Sector
Actual  9.3  5.4  12.0  The  second  is  an  analysis  of the  effect  of
Difference  2.9  0.3  4.4  high volume purchases of a commodity by the
a Percent change in income times 0.18 (income elasticity  for  food  service  sector  on  farm  price  volatility.
food) plus the  percent change  in population.  Demand  by the food  service  sector is gener-
b Actual percent  change minus the  base percent  change.  ally  assumed  to be  more price  inelastic for a
SOURCE:  Derived  from  Gallo, Appendix Table 38.  given  commodity  than  the  demand  through
food stores.  For commodities  where  produc-
For the  food  sector  as  a whole,  including  tion  tends  to  be  variable,  farm  prices  may
transportation  and  other  supporting  in-  become  more  volatile  as  a  larger  portion  is
dustries,  real added value grew an average of  sold  through  the  price  inelastic  market  seg-
0.5 percent per year faster than the base rate  ment.  Examples  of  commodity  sub-sectors
over  the  1972-87  period.  The  growth  rate,  where  this  problem  might  exist  include  let-
above  that expected  from population  and in-  tuce, broilers, and potatoes.
come  expansion,  was  a  modest  2.9  percent  Christy and Conner correctly point out that
from 1972-77,  0.3 percent for 1977-82, and 4.4  price elasticities differ for different  foods, but
percent for 1982-87. If there is a potential for  that  demand is inelastic for most foods.  This
24means that the impacts of food manufacturing  manufacturing  firms  (U.S.  Dept.  of  Com-
and marketing activities which result in altering  merce).
relative prices will affect individual commodity  The  second  focus  of  concern  surrounding
groups  in different  ways.  I  would suggest  to  mergers  relates  to  increasing  concentration
the  authors,  however,  that  more  recent  and the potential impact on monopoly pricing,
sources of empirical price elasticity estimates  market access for farm producers, and margin
are  available  than  the  1961  Brandow  study  behavior. As indicated in the Christy and Con-
cited in their paper.  ner  paper,  recent  concentration  within  the
Industry structure and organization is iden-  meat packing  and flour milling industries has
tified in the Christy and Conner paper as hav-  generated  the  most  concern.  Currently  our
ing implications for producers and consumers.  research  base on  assessing the effects  of the
However,  the  discussion  does  not  present  increased concentration  is very limited.
specific  current  organizational  issues  or  the  These  are  some  of  the  economic  issues
details  of implications  to  consumers  or  pro-  related to food marketing which beg for more
ducers.  Current  issues  related  to  industry  research efort.
organization  focus  on  the  high  level  of  Finally,  I want to comment  on the regional
mergers, acquisitions,  and leveraged buyouts  growth  proectionmodel  for  alue  of
within  the  food  marketing  sector.  The  shipments presented  by Christy and  Conner.
American  Institute  of  Food  Distribution  The model, as estimated,  states that the 1972
estimates that during  1987 there were a total  to  1982  change  in  value  of  shipments  for  a
of 514 separate acquisitions in the processing,  given  region  i  a function  of the  population
wholesaling,  retailing,  and  foodservice  se-  change  and 1972 wage levelsfor food process
tors.  At  the  same  time  there  were  197  ing  industries  in  the  state.  The  model
divestitures.  explains  21 percent  of the change in value of
shipments  between  1972  and  1982  for  50
Concerns  about  the  high  level  of  merger  states.
activity  center  around  two  areas.  The  first  I  question  the  value  of presenting  results
relates  to  how  leveraged  buyouts  increase  based  on  such  a  simplified  model.  Regional
debt  loads  and  the  firm's  ability  to  meet  growth in manufacturing  capacity depends on
interest  and  principle  payment  obligations  a myriad of factors,  including relative  energy
during periods of economic recession.  Related  costs, taxes, access to markets,  access to raw
is the issue of how earnings might be diverted  product,  input  prices  relative  to  other  loca-
from capital investment and  R & D activities  tions, labor markets,  relative  income growth,
to  interest  payments  with  implications  for  and technological  change.  Many  of these fac-
long-term productivity growth.  tors were identified in the Christy and Conner
The  value  of  food marketing  mergers  and  paper as  being important,  but were  then  ig-
leveraged buyouts ranged between $20 billion  nored in the empirical analysis.
and  $26 billion per year during  1985 through  In  summary,  it  is  vitally  important  for
1987 (Grimm).  In 1988,  the five largest trans-  agricultural and other economists  to focus at-
actions  alone  were  valued  at more  than  $50  tention on the food marketing sector. Not only
billion.  In  the  third  quarter  of  1987,  total  is it  important  to  regional  economic  growth
liabilities  for  corporations  in  SIC  groups  20  and the  generation  of value-added  economic
and  21  were  $140.7  billion.  By  third quarter  activity,  but productivity  and  economic  effi-
1988,  the  total had increased  to $155  billion.  ciency within  this  sector  have  important  im-
Long-term  debt increased from 27 percent of  plications  for producers,  consumers,  and the
assets'in third quarter 1987 to 28.4 percent of  performance  of  the  larger  economy.  Unfor-
assets  in  third  quarter  1988  (U.S.  Dept.  of  tunately, the Christy  and Conner paper does
Commerce).  Based  on  transactions  already  not  provide  the  analysis  needed  to  answer
agreed  to,  long-term  debt  could  increase  to  some of the more important questions. Maybe
$175  to $180  billion by third quarter 1989. The  we  shouldn't  expect  it  to.  Hopefully,  their
ratio of assets to total liabilities is 1.4 for food  paper and these comments will stimulate addi-
manufacturing  firms  versus  1.54  for  all  tional research  effort.
25REFERENCES
American  Institute  of Food  Distribution,  Inc.  The Food Institute Report. Fair  Lawn,  N.J.,
selected issues.
Gallo,  A.  E.  Food  Market Review,  1988.  Forthcoming  AER,  Economic  Research  Service,
U.S.D.A.,  Washington,  D.C.
Grimm,  W. T. Mergerstat Review, Chicago,  selected issues.
Myers, L. H. "Productivity Measurement in Food Marketing."  Paper presented at Joint ERS/IR-6
Conference  on New Measurement  Procedures  for U.S. Agricultural  Productivity, Washing-
ton, D.C., March 31 and April 1, 1988.
Polopolus,  L.  "Agricultural  Economics  Beyond  the  Farm  Gate."  Amer.  J. of Agr.  Econ.,
64,5(1982):803-10.
Putnam, J. J. Food Consumption, Prices, and Expenditures, 1966-87. Statistical Bul. No. 773,
Economic  Research Service,  U.S.D.A., Washington,  D.C., January  1989.
U.S. Dept. of Commerce. "Quarterly Financial Report." Bureau of Census, Washington, D.C.,
selected issues.
26

ECONOMIC FORCES INFLUENCING VALUE-ADDED FOOD INDUSTRIES: IMPLICATIONS FOR SOUTHERN AGRICULTURE: DISCUSSION

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