Walsh, Richard G.

English

Research Papers in Economics

Discussion  of
Structural  Changes  in  the
Food  and  Fiber  System
Richard G. Walsh
Knowledge  such  as a basic understanding of the
food  and  fiber  sector,  seems more  like  a dead fish
in  the  creel  than  anything  else.  It  ages  quickly.
This  has  been  one  of my recurring  frustrations in
economic  research  and  teaching.  Knowledge,  once
gained, grows stale.
I  feel  uneasy,  for  example,  about  my  under-
standing of product differentiation  and barriers  to
entry  into  food  manufacturing,  and  of  vertical
integration  into food processing  by grocery  chains.
Just  ten  years  ago,  in  1966,  I  helped  prepare
chapters  on  these  topics  for the National  Commis-
sion  on Food  Marketing.  Now,  Congress is consid-
ering  legislation  to  establish another food commis-
sion. Such a research effort is sorely needed.
Economic  history is important, of course.  With-
out  an  understanding  of structural  changes  in  the
past, our view of present  changes lacks perspective.
We  are  doomed  to  repeat past  mistakes.  It seems
to  me  of  critical  importance  that  we  understand
the  relationship  between  trends  in  structure  and
market  behavior,  between  structure  and  perform-
ance,  and  between  structure  and  policy.  This is  a
large  order.  It  seems that only  a National  Commis-
sion can  muster  the  necessary  resources to accom-
plish such a large  research task.
It would  be  unfair to expect the  participants in
this program  to  fulfill  the  need for such basic  eco-
nomic knowledge.  I am grateful  for what they have
done.  They  have  given  us  an  informative  and  up-
to-date  review of many trends which are important
to managerial decision making in the food and fiber
sector.  For  example,  they  review aspects of trends
in efficiency,  population,  energy,  capital,  multina-
tional  corporations  and commodity markets. Their
unique  knowledge  and  concern  for  these matters
reflects  their experience  as corporate  insiders, with
access to the executive  suite. It need hardly  be said
Richard G. Walsh is a professor,  Department of Economics,
Colorado  State  University.
that  most  of  their  comments  on the  implications
of recent trends for structural  changes seem  also to
reflect  their  day-to-day contact  with the  corporate
management  point of view.
Both  Hammonds  and  Hayenga  discuss elements
of  a  kind  of "Future  Shock,"  as in Tofler's book
by  that  title,  which  has  beset  the  food  and  fiber
sector  in  the past  five years. Tofler's main thesis is
that  changes  are  occurring so fast that man and his
institutions  are unable to cope. The old knowledge
is fast outdated; the old remedies  do not work.
According to Hayenga,  "...  .the  shocks..  .have
made  investors  and  management  in  the  food  in-
dustry  much  more  wary."  He  concludes  that  the
overall  economic  environment  of  the  food  and
fiber  sector  may  be  characterized  as  "more uncer-
tain,  with  potentially  greater  price,  supply  and
policy  instability  than was  the  situation  five years
earlier."  Then, it seems to me  he says that the con-
ventional  oligopolistic  remedies have been applied.
The  results  include  higher margins  - "to  build
larger  risk premiums into product pricing decisions
...  .and  to transfer or eliminate some  of (the) in-
creased  risks.  . ." Thus, he  acknowledges:  "though
the  severe  recession  led to operating capacities less
than  70  percent  of  capacity.  ..  price-cutting  was
definitely  not  in  vogue  as  was  the  case  in earlier
recessions.  Rather  (the)  maintenance of margins
and  internal  cash  flow  probably  became  much
more  important  motivations  . . ."  to both  large
and small firms.
Hayenga  suggests  that  when  concentration  sta-
tistics  become  available  for  the  past  five  years,
they  will  show increases. He  seems to favor the ex-
pected  trend,  wondering  "whether  the  competi-
tion  in individual  markets  by  more  viable,  finan-
cially  secure  firms  might not  be more  viable  (and
less sporadic) in the long run."
Hammonds  concludes  that:  "the  super  market
sector  is  in  for  a  period  of intense  competition
39Western J. Agr. Econ.
between  now  and  at  least  1980."  He  shows  that
this intense competition will be among larger stores
with  sales of more  than $4 million annually. They
are  the  most  rapid  growing  segment  of  food  dis-
tribution,  increasing  by  one-third  between  1974
and  1975.  These  7,000  stores  have  total  sales of
nearly  $42  billion  annually.  He  expects that  with
the  demise  of inefficient  operators,  the number of
super  markets  will  decline  from  32,000  today to
about 25,000 by 1980.
To  many  economists,  Galbraith  for  one,  the
expected  economic  result  from  these  trends  in
number  of  stores,  store  sizes  and  competition,
would  be  increased  efficiency.  However,  the
evidence  Hammonds  presents  suggests  the
opposite.  The  efficiency of capital employed has
declined  about  4  percent  annually.  This  is  based
on  average  sales  per  square  foot  of  selling space,
deflated  by  the  food-at-home  portion  of the  con-
sumer  price  index.  USDA data show labor produc-
tivity  in  food  retailing  stood  at the  same  level  in
1974  as it was in  1964, ten years earlier.
No  information  was  presented  at  this  session
on  the  trends  in  food  prices,  the  gross  margins
of  food  retailers,  or  the  profit  trends  of  food
processors  and  retailers.  The information  on these
trends  currently  available  from  other  sources  is
also  incomplete.  However,  in  the  past  few years,
consumer  prices  for  food  have  increased  by
approximately  one-half.  We  should  know  what
proportion  of  this  rise  was  due  to  farm  price
increases,  and  what  proportion  resulted  from
increased  gross  margins  of processors and  retailers.
Other  sources  suggest  that  large  food  processors
have  received  higher  profits  than  the  average  for
all  industries.  In  the  Western  States, Safeway  and
Albertson's  grocery  chains  also  have  had  higher
profits than  all industries.
This  is  not  the  expected  performance  result
from  intense  competition.  It is the expected result
of increasing  concentration  of economic  power.
The  Joint  Economic  Committee  of Congress  has
prepared  data  from  the  1972  Census showing that
profit rates rise in  grocery  retailing  with increased
market  share  of  individual  companies  and  with
increased  market  concentration  at  the  four  firm
level.
The  50  largest  food  manufacturing  companies
have  increased  their  dominance.  From  1950  to
1974, their share of total food sales increased  from
41  percent  to 56  percent. Over the same  25 years,
their  profits  have  also  increased  relative  to  the
average  of all manufacturing  industries in the U.S.,
and are at higher levels today.
No  information  was  presented  in  this  session
on  anti-competition  practices.  Yesterday,  the
Denver Post reported  the  Federal  Trade  Commis-
sion has alleged the General  Foods Corporation  en-
gaged  in monopolistic  practices  to foreclose  entry
into  the  Northeast  U.S.  coffee  market.  Folgers
coffee  division controls 45 percent  of that market.
The  Seevers  paper raises a number of important
issues  about  the  regulation  of commodity  futures
markets.  Probably,  most important  is  his  explor-
ation  of  the  benefits  and  costs  of  government
regulation.  The  National  Science  Foundation  re-
cently  awarded  substantial  research  contracts  to
Pennsylvania  State  University  and  Colorado  State
University  to  develop  measures  of  benefits  and
costs  of  regulating  hamburger  production  and
consumption  from  the ranch to the consumer.  It is
suggestive  that  in  the  case  of  possible  reduced
regulation  of  milk  quality,  it  has  been  estimated
that milk  prices could  fall  to three-fourths  of their
current  levels.  The next  decade  may see  more and
more  economists  turn  their  attention  to  the
important  questions  concerning  the  performance
of  regulations  with  respect  to  a  number  of  food
and  fiber  products.  This  may  become  a  new
direction for an applied institutional  economics.
40
June 1977

DISCUSSION OF STRUCTURAL CHANGES IN THE FOOD AND FIBER SYSTEM

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Research Papers in Economics