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Consolidation and agribusiness

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Daisy Ifeoma
Daisy Ifeoma

This document discusses consolidation and concentration in the agribusiness sector. It notes the trend toward fewer and larger firms across food and agriculture businesses. Extensive consolidation can result in economic concentration where one or a few large firms have the power to influence prices. The document examines different types of consolidation like horizontal and vertical. It also outlines concerns that consolidation raises for farmers like facing market power from large firms, loss of price discovery, and environmental impacts. Finally, it discusses potential measures to address issues stemming from consolidation like affecting industry structure, increasing bargaining power, and regulating market behavior.

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CBU 5205 Agribusiness Marketing CONCENTRATION AND CONSOLIDATION IN THE AGRIBUSINESS SECTOR Daisy Odunze
Trend toward fewer and larger firms across most of the range of different types of businesses in the food and agriculture sector have increased. This process of growth and merger of firms is usually described as consolidation. It is generally agreed that as consolidation increases, it will at some point bring about changes in the economic structure and functioning of markets in the sector.
Extensive consolidation results in what is called concentration or economic concentration, the degree of which can be measured by economic formulas. If concentration continues to increase, there is a level beyond which the actions of one or more of the few remaining firms can significantly affect prices for goods. A firm having this capability to affect prices (paid or received) possesses market power.
While larger consolidated firms are often able to leverage costs and capture economic gains on a national and global scale, as well as through various stages of integrated operations, independent agriculture, which is highly diversified, is relatively disadvantaged because it typically cannot leverage costs beyond the farm gate
Dynamics of consolidation Horizontal consolidation is the result of the merger or combination of two or more firms (or their assets) in the same industry and which are engaged in the same stage of the production cycle. This form of consolidation is rather common in the general economy. It occurs at all levels of the food and agriculture sector and would also include consolidation of farmland ownership at the local level.
Dynamics of consolidation Vertical coordination or integration occurs when one firm acquires or allies with another firm in the same industry but at another stage of the production cycle. Such integration is now rather pervasive in the agricultural sector, and often it spans the full marketing chain through a combination of production contracting or strategic alliances as well as outright purchase.
Dynamics of consolidation To some extent, business firms seek horizontal consolidation or vertical integration in order to reduce uncertainty and generate savings in their input and transaction costs. Economic analyses suggest that the desire to capture economies of scale and economies of scope, and to increase revenue, is a common motivation for such actions.
Dynamics of consolidation With respect to vertical integration, there are benefits from internalizing (i.e., keeping within the firm or the production chain it controls) the transaction costs between stages in the production cycle, thereby reducing the uncertainty of some cost components in the process. However, research does indicate that for large-sized firms, diseconomies of scale resulting from bureaucratic control problems can overwhelm economies of scale and inhibit growth.
Dynamics of consolidation Conditions that can result in market power, and the extent to which they are met within the agricultural sector, include: Possession of superior information Greater participation in a larger number of segments of a market Control over channels in the marketing system
Measuring consolidation and economic concentration A commonly used measure of the degree of horizontal consolidation or concentration in a market is referred to as the four-firm ratio. This ratio is defined as the sum of the percentage market shares of the four largest firms participating in the market Among economists who utilize the four-firm concentration ratio measure, in general it is believed that as the ratio increases above about 40 percent the markets competitiveness begins to decline. The higher the ratio above that level the less competitive the market.
Measuring consolidation and economic concentration An alternative measure of horizontal market concentration is the Herfindahl-Hirschmann Index (HHI), used frequently in evaluations by the Department of Justice (DOJ) in anti-trust investigations. The HHI is calculated by summing the squares of the percentage of the market held by each competitor. For example, a sector with two firms each controlling half of the market would have an HHI of 5,000, (2*502). Markets with HHI measures above 1,800 are considered by DOJ to be highly concentrated.
Measuring consolidation and economic concentration In many agricultural distribution and processing markets, the four-firm concentration ratios have already exceeded the 40-45 percent benchmark cited above, in some cases substantially. In such already-concentrated markets, there is a serious question whether the objective of any further consolidation would be greater technical efficiency (including improved marketing) or pursuit of market power
Concerns Raised by Consolidation and Concentration for farmers Farmers on wrong end of market power: To what extent can these large-scale firms influence their input or output prices (defined as market power), either nationally or regionally? High levels of agribusiness consolidation hurt family farming Farmers losing share of retail food dollar: Over the last few decades, the farm share of the retail food dollar has been steadily falling
Concerns Raised by Consolidation and Concentration for farmers Traditional price discovery threatened: Consolidated and vertically integrated food and agriculture firms commonly secure captive supplies of commodities or raw materials either through direct ownership or contractual arrangements captive supplies increase price instability for producers that sell outside the integrated channels, increasing their costs of doing business by forcing them to spend more time and money to find buyers, as well as decreasing their prices
Concerns Raised by Consolidation and Concentration for farmers Vertically integrated firms tend to rely on large farms for such contract production and are less willing to work with small or medium-sized farms which provide less output volume. Thus, most remaining independent farmers must rely on spot markets for price discovery, which do not reflect the majority of transactions when captive supply practices dominate that market.
Concerns Raised by Consolidation and Concentration for farmers Contract producers lack control over operations: Even while independent farmers face the adverse effects of uneven market power and poor price discovery in their transactions, their counterparts who participate in the system experience effects of market power. In general, as a sector becomes more fully integrated, the options available to an individual producer become limited and that farmers ability to reject or negotiate undesirable terms in a contract diminishes or vanishes.
Concerns Raised by Consolidation and Concentration for farmers Agricultural dumping: the process whereby an agricultural company in one country exports its product to another country at a price that is lower than what it actually cost to produce the product is known as agricultural dumping. A high level of consolidation is one contributing factor to dumping.
Concerns Raised by Consolidation and Concentration for farmers Corporate influence: an increased level of agribusiness consolidation also means that agribusiness corporations have incredible influence over agricultural policy decisions. Through donations and lobbying, agribusiness firms make sure that government policies will not restrain their ability to make profits.
Concerns Raised by Consolidation and Concentration for farmers Environmental Impacts: there are serious environmental impacts of agribusiness consolidation. Consolidation contributes to soil and water contamination due to increased dependence on pesticides and other chemicals, soil erosion from producing only one crop, as well as loss of biodiversity. For those who care about environmental sustainability, consolidation is a serious issue.
Measures The question for policy makers is what are the appropriate measures to deal with the real possibility of market impacts and detrimental consequences stemming from consolidation and economic concentration?
Measures Affect the structure of the industry. The main argument in support of this approach is that it will decrease the power of one of the players because it will provide more choices in the market. Prohibit certain types of businesses from owning certain types of other businesses or assets Merger review Break up firms
Measures Increase bargaining rights or market position of weaker party. Instead of limiting the power of a more dominant firm, this approach attempts to increase the bargaining power of the party who traditionally has relatively few options in the marketplace. Cooperative bargaining Right of association
Measures Regulate the behaviour of market participants. This approach does not affect the actual structure of the industry, but tries to limit the negative consequences by regulating the behaviour of market participants. Contract regulation(how can the contract be regulated) Limit the types or terms of contracts a firm may enter into Provide more transparency in the marketplace
Measures Improve enforcement: many argue that adequate laws already exist in most countries and that the most effective approach to improving competition policy is not to change substantive laws but to improve the enforcement regime.
Conclusion A decentralization of power within the agricultural system is an important step in ensuring the livelihoods of small farmers worldwide and promoting an agricultural system where everyone has a right to food.

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Consolidation and agribusiness

  • 1. CBU 5205 Agribusiness Marketing CONCENTRATION AND CONSOLIDATION IN THE AGRIBUSINESS SECTOR Daisy Odunze
  • 2. Trend toward fewer and larger firms across most of the range of different types of businesses in the food and agriculture sector have increased. This process of growth and merger of firms is usually described as consolidation. It is generally agreed that as consolidation increases, it will at some point bring about changes in the economic structure and functioning of markets in the sector.
  • 3. Extensive consolidation results in what is called concentration or economic concentration, the degree of which can be measured by economic formulas. If concentration continues to increase, there is a level beyond which the actions of one or more of the few remaining firms can significantly affect prices for goods. A firm having this capability to affect prices (paid or received) possesses market power.
  • 4. While larger consolidated firms are often able to leverage costs and capture economic gains on a national and global scale, as well as through various stages of integrated operations, independent agriculture, which is highly diversified, is relatively disadvantaged because it typically cannot leverage costs beyond the farm gate
  • 5. Dynamics of consolidation Horizontal consolidation is the result of the merger or combination of two or more firms (or their assets) in the same industry and which are engaged in the same stage of the production cycle. This form of consolidation is rather common in the general economy. It occurs at all levels of the food and agriculture sector and would also include consolidation of farmland ownership at the local level.
  • 6. Dynamics of consolidation Vertical coordination or integration occurs when one firm acquires or allies with another firm in the same industry but at another stage of the production cycle. Such integration is now rather pervasive in the agricultural sector, and often it spans the full marketing chain through a combination of production contracting or strategic alliances as well as outright purchase.
  • 7. Dynamics of consolidation To some extent, business firms seek horizontal consolidation or vertical integration in order to reduce uncertainty and generate savings in their input and transaction costs. Economic analyses suggest that the desire to capture economies of scale and economies of scope, and to increase revenue, is a common motivation for such actions.
  • 8. Dynamics of consolidation With respect to vertical integration, there are benefits from internalizing (i.e., keeping within the firm or the production chain it controls) the transaction costs between stages in the production cycle, thereby reducing the uncertainty of some cost components in the process. However, research does indicate that for large-sized firms, diseconomies of scale resulting from bureaucratic control problems can overwhelm economies of scale and inhibit growth.
  • 9. Dynamics of consolidation Conditions that can result in market power, and the extent to which they are met within the agricultural sector, include: Possession of superior information Greater participation in a larger number of segments of a market Control over channels in the marketing system
  • 10. Measuring consolidation and economic concentration A commonly used measure of the degree of horizontal consolidation or concentration in a market is referred to as the four-firm ratio. This ratio is defined as the sum of the percentage market shares of the four largest firms participating in the market Among economists who utilize the four-firm concentration ratio measure, in general it is believed that as the ratio increases above about 40 percent the markets competitiveness begins to decline. The higher the ratio above that level the less competitive the market.
  • 11. Measuring consolidation and economic concentration An alternative measure of horizontal market concentration is the Herfindahl-Hirschmann Index (HHI), used frequently in evaluations by the Department of Justice (DOJ) in anti-trust investigations. The HHI is calculated by summing the squares of the percentage of the market held by each competitor. For example, a sector with two firms each controlling half of the market would have an HHI of 5,000, (2*502). Markets with HHI measures above 1,800 are considered by DOJ to be highly concentrated.
  • 12. Measuring consolidation and economic concentration In many agricultural distribution and processing markets, the four-firm concentration ratios have already exceeded the 40-45 percent benchmark cited above, in some cases substantially. In such already-concentrated markets, there is a serious question whether the objective of any further consolidation would be greater technical efficiency (including improved marketing) or pursuit of market power
  • 13. Concerns Raised by Consolidation and Concentration for farmers Farmers on wrong end of market power: To what extent can these large-scale firms influence their input or output prices (defined as market power), either nationally or regionally? High levels of agribusiness consolidation hurt family farming Farmers losing share of retail food dollar: Over the last few decades, the farm share of the retail food dollar has been steadily falling
  • 14. Concerns Raised by Consolidation and Concentration for farmers Traditional price discovery threatened: Consolidated and vertically integrated food and agriculture firms commonly secure captive supplies of commodities or raw materials either through direct ownership or contractual arrangements captive supplies increase price instability for producers that sell outside the integrated channels, increasing their costs of doing business by forcing them to spend more time and money to find buyers, as well as decreasing their prices
  • 15. Concerns Raised by Consolidation and Concentration for farmers Vertically integrated firms tend to rely on large farms for such contract production and are less willing to work with small or medium-sized farms which provide less output volume. Thus, most remaining independent farmers must rely on spot markets for price discovery, which do not reflect the majority of transactions when captive supply practices dominate that market.
  • 16. Concerns Raised by Consolidation and Concentration for farmers Contract producers lack control over operations: Even while independent farmers face the adverse effects of uneven market power and poor price discovery in their transactions, their counterparts who participate in the system experience effects of market power. In general, as a sector becomes more fully integrated, the options available to an individual producer become limited and that farmers ability to reject or negotiate undesirable terms in a contract diminishes or vanishes.
  • 17. Concerns Raised by Consolidation and Concentration for farmers Agricultural dumping: the process whereby an agricultural company in one country exports its product to another country at a price that is lower than what it actually cost to produce the product is known as agricultural dumping. A high level of consolidation is one contributing factor to dumping.
  • 18. Concerns Raised by Consolidation and Concentration for farmers Corporate influence: an increased level of agribusiness consolidation also means that agribusiness corporations have incredible influence over agricultural policy decisions. Through donations and lobbying, agribusiness firms make sure that government policies will not restrain their ability to make profits.
  • 19. Concerns Raised by Consolidation and Concentration for farmers Environmental Impacts: there are serious environmental impacts of agribusiness consolidation. Consolidation contributes to soil and water contamination due to increased dependence on pesticides and other chemicals, soil erosion from producing only one crop, as well as loss of biodiversity. For those who care about environmental sustainability, consolidation is a serious issue.
  • 20. Measures The question for policy makers is what are the appropriate measures to deal with the real possibility of market impacts and detrimental consequences stemming from consolidation and economic concentration?
  • 21. Measures Affect the structure of the industry. The main argument in support of this approach is that it will decrease the power of one of the players because it will provide more choices in the market. Prohibit certain types of businesses from owning certain types of other businesses or assets Merger review Break up firms
  • 22. Measures Increase bargaining rights or market position of weaker party. Instead of limiting the power of a more dominant firm, this approach attempts to increase the bargaining power of the party who traditionally has relatively few options in the marketplace. Cooperative bargaining Right of association
  • 23. Measures Regulate the behaviour of market participants. This approach does not affect the actual structure of the industry, but tries to limit the negative consequences by regulating the behaviour of market participants. Contract regulation(how can the contract be regulated) Limit the types or terms of contracts a firm may enter into Provide more transparency in the marketplace
  • 24. Measures Improve enforcement: many argue that adequate laws already exist in most countries and that the most effective approach to improving competition policy is not to change substantive laws but to improve the enforcement regime.
  • 25. Conclusion A decentralization of power within the agricultural system is an important step in ensuring the livelihoods of small farmers worldwide and promoting an agricultural system where everyone has a right to food.