Answers to Problems and Discussion

Solutions Manual For Agricultural Economics Third Edition Evan H. Drummond John W. Goodwin 1 / 4

Answers to Problems and Discussion Questions

1 2 / 4

Answers to Problems and Discussion Questions Chapter 1

• Identify the four sectors in the food industry. For firms in each of the four sectors

identify what they buy and what they sell. From what firms do they buy inputs; and, to what firms to they sell their outputs?

• The farm service sector sells items that are used as inputs

by farmers, ranchers, and growers. For the most part, they are manufacturing companies (John Deere, Dupont) that buy raw materials such as steel and petroleum and manufacture them into farm inputs such as tractors and pesticides.

• Producers are those firms that make food and fiber

products. They buy inputs from the farm service sector. These inputs are normally combined with some land, labor, and rainfall to produce food products that are sold to the processing sector.

• The processing sector buys raw agricultural commodities

from producers and converts them into food ingredients or food products.Processors are essentially industrial companies that convert corn into soda pop and wheat into bread. Most processors sell their products to one another or in the case of final food products to wholesalers or large retail chains such as Kroger or Wal-Mart.

• Marketers are those firms that buy food products in bulk

from processors and deliver it in small lots to the final consumer where and when she wants it. Marketers serve both the food service (i.e., restaurants, campus cafeterias) and the retail (supermarkets) markets with distribution services.

• An important part of the farm service sector is the Cooperative Extension Service

with an office in virtually every county of the U.S. Contact the local office of your Cooperative Extension Service or visit the website of your state office of Cooperative Extension Service to determine what this publicly funded agency does. Who are the clientele and what are the services provided?The clientele of the Extension Service originally was the farm or rural family. Today Extension serves everybody with educational and leadership programs. The range of services provided extends from information for the weekend gardener to nutrition assistance for the indigent.

• What proportion of all farm units in the U.S. is economically viable with sales of

at least $250,000 per year?About 8%, or 160,000 farms have sales above $250,000.

2 3 / 4

4. Discuss the following proposition and its implications: most farm owners are

more interested in a rural way of life than in food production.Most rural residents who technically qualify to be classified as farmers are only incidental farmers. They most certainly are not the providers of food for the other 98% of the population. Programs and policies that are directed at protecting and enhancing our food industry must be directed at those 160,000 farms that produce most of our food.

• What is vertical integration? What are the advantages of vertical integration?

What are the concerns about vertical integration?Vertical integration refers to the combination of several stages of a production process under a single management structure. The advantage of vertical integration is that it provides coordination among the stages by management rather than through markets. By reducing the number of times a commodity moves through markets with their inevitable costs, the vertically integrated firm can usually produce at a lower cost than is possible without vertical integration. The concern is that the vertically integrated firm can become so dominant in a particular market that their market power results in lower prices to farmers and higher prices to consumers. For example, while Butterball ® is the largest selling brand of turkey in the U.S., it is safe to say that customers do not buy Butterball ®

turkeys because they are the cheapest turkey in the market.

• What is concentration in the processors sector and why is it considered to be a

threat to producers?Concentration refers to the number of firms in a particular

industry: the smaller the number of firms, the higher the concentration. In

general, concentration is associated with a loss of competition as the few firms in the industry find it more profitable to cooperate rather than compete. Producers complain that they are competitors selling to highly concentrated processors that have greater market power than the producers. Producers blame processors for low prices paid to producers.

• Identify the major beef packers (i.e., commodity processors) in the U.S. and the

share of the market held by each.The beef packing industry is undergoing rapid change at the present time and any estimates presented are certain to be out of date by the time of publication. The best source for information on this industry is cattlebuyersweekly.com. For years, the industry leader has been IBP, Inc.(formerly Iowa Beef Processors). In 2001-2002 IBP was acquired by Tyson Foods, the poultry processor. Farmland National is getting out of the beef packing business and Smithfield Foods (a major pork processor)

is getting in. In 2002, the industry looked something like this:

• / 4