'It is a very Darwinian market out there,' says economist on concentration of US agribusiness

Portions of the agricultural market, especially the production of livestock have been getting ‘thinner’​ or more concentrated for many years, said Richard Sexton, department chair and professor of agricultural and resource economics at the University of California Davis.

“It’s a long standing concern among farmers, their advocates and policy makers that as these markets get thinner – fewer breeders, fewer transaction – there will be less transparency and more power that will accrue to the buyers,”​ he told FeedNavigator. “And there are practical difficulties that the government faces in these types of markets, most notably with crop insurance programs.”​

Despite the thinner markets, there has not been the distortion of pricing that was feared, said Sexton. “If certain structural conditions are in place in an agricultural market it can create a symbiotic relationship between the farmer and the downstream customer,”​ he added.

Market consolidation​

Thinning markets are considered those with few purchasers, low trading value and low liquidity, said the USDA.

“The number of farms accounting for half the value of all sales of several major U.S. commodities fell by at least 50 percent from 1987-2012,” ​the agency said in a report published in April​​. There were about 15,000 farms producing hogs in 1987, by 2012 there were about 4,500, it added.

The trend toward a consolidated market is being driven by international competition and the need for efficiency – larger producers can be more efficient and realize more cost benefits through economy of scale, said Sexton. “It is a very Darwinian market out there,”​ he added.

“The entities that are likely to be left behind are the smaller producers,” ​he said. “They’re likely to be less efficient, less valuable in a contract setting.”​

Although he said he does not want to see the market continue to lose smaller producers, the solution likely is not to force efforts back to a spot or cash market. “If pressed to offer policy solutions, it would be to attack the inefficiency of small farms directly, to do things to enable smaller scale operations to be more efficient or cooperation [with others],”​ he added.

Feed factor​

Many of the feed grain commodities, like corn and soybeans or soy meal, do not face the same thinning market, said Sexton. However, they have seen an increase in competition.

“The major consideration there, from the perspective of livestock producers, is the competition either directly in the case of corn with ethanol production or indirectly with the competition for land,”​ he said.

The ethanol mandates, where an amount of corn is used to make biofuel, have added complications for livestock producers seeking inexpensive animal feed, he said.

“It killed that industry [farmed catfish] by raising the price of feed when the output cost couldn’t be raised and compete with catfish from Vietnam and China,”​ said Sexton. Renewable fuel also harmed other livestock sectors, he said.

Increasing transparency in pricing​

Transparency within a thinner market is one area that raises questions, said Sexton. It can be harder for producers and regulators to get information about prices and established practices when goods are not publically traded.

Agricultural safety net programs like crop insurance are often tied to market prices, he said.

“In many cases it’s hard for the USDA to discover what the prices are [if] there’s not public trading,” ​he said. “When the products are exchanged through contracts, unless there’s a reporting mechanism, it’s hard to know what the prices are.” ​

If many items move to sale by contract, it also can create distrust in the process, he said. However, thinner markets have been driving more production into contract work.

Many of the policies seeking to protect producers look to regulate or disrupt the contract process, he said. But those efforts and work to mandate price reporting may not have the best outcome

Mandatory price publishing could establish a low benchmark price for purchasers, he said. However, an alternative method might be to require the posting of blank contracts.

“You can look at provisions and compare it to what your peers are working with,” ​he added.

Relationships, adaptations and forward momentum​

In a condensed market, the purchaser of a commodity can have much of the power in the relationship, said Sexton. A concern is that the customer could distort prices or press a producer to make negative trades because there were few opportunities to sell a specific product.

“You could gain more profits, but you’d drive me and others like me out of business or into producing a different crop,” ​he said. “The downstream buyers are operating very capital intensive, specialized processing facilities that are not usable for other opportunities – if you drive your supplier out of business what have you gained?”​

Instead, many businesses have started to take a long view perspective of relationships along the supply chain, he said. “If the producer goes out of business it’s bad news for the buyer,”​ he added.

“I’ve talked to people operating downstream processing or packaging and the thing that’s most important is to operate at efficient capacity, and if they fail to do that because they don’t have an adequate supply of cattle or hogs or raw material, they don’t operate efficiently,” ​he said. “That’s going to have a dramatic effect on their profit.”​

Additionally, anything that damages or delays production could make it harder for the customer to meet their own responsibilities, said Sexton. “If you’re unable to meet those sales contracts as a processor or packer you’re probably not going to get contracts in the future,”​ he added.