Sunday, September 24, 2006

Interesting Conversation on Vertical Integration


Over at the Center for Rural Affairs, an interesting post decries Smithfield Foods' acquisition of Premium Standard Farms.

Mentioning the Wal-Mart effect, despite its rhetorical value, interestingly highlights the role of consumers and retailers in farm policymaking (specifically, the efforts of saving family farms). As I understand it, large retailers collect and concentrate consumer demand for a wide range of food at low prices. And they do this by selling large volumes of goods, including food, at the lowest price they can. That effort places pressure on processors who want to utilize these retail outlets. That pressure can result in increased production volume and the acquisition of some of the subsidiary inputs as a means of controlling production costs. This, in turn, pushes out some small production efforts or pushes some producers into production contracting that in turn exerts pressure on them to contain costs, which could mean an expanded operation.

If one makes the normative judgment that all of this is bad (as the post does, and for which I could think of various arguments that dispute or champion that judgment), who is to blame?

The blame game is fun to some, and it is easy to point the finger at antitrust enforcement, large retailers, and large processors. But I think rooting out the cause of the problem is difficult because some of the blame may belong to even larger players like the nature of our economic system and consumer power. For example, isn't the very economic system in which we operate supposed to encourage efficiency? And isn't this system a model of pursuing economic efficiency? I suppose the demand side of the market for producers has become more concentrated, but can we consider that problem in isolation? That is, aren't processors feeling the same pressures from retailers? And, if so, why are retailers so powerful? Isn't it because we utilize them when we make the ultimate choice of how to allocate our income? And, if so, does the ultimate problem lie in the choices consumers make? Should consumers be so empowered, or should we overcome their will with legislation that makes choices for them? If consumers should make the choice, is the real problem here that consumers aren't willing to value family-farm support when they make food choices? Do they need more opportunities to allow real choices? Would they make the pro-family-farm choice if they had enough information about how their choices affect family farms? Professor Hamilton may be on to something with his notion of Food Democracy.

Externalities, of course, may take a hit as firms seek to push off whatever costs it can. Thus, as the post mentions, vertical integration may exacerbate the environmental harms that agricultural production causes. But this could happen in the absence of integration [though the on-site concentration of production is problematic in the livestock sector and that concentration is due, in part, to vertical integration.] So, to bring environmental externalities to bear on the subject in a way that supports smaller production firms and family farms, one needs to make an effort to distinguish such firms from integrated ones in terms of how the smaller would be more likely to protect the environment. That subject is difficult, and beyond the scope of this post, but the question looms.

2 Comments:

Blogger Morgan Holcomb said...

This post raises a host of interesting questions. It sure seems that all one has to do is mention Wal-Mart to get people up in arms (on both sides). As to your last point, the environmental impact of smaller concerns, see Jim Chen's aptly titled, "Get Green or Get Out" for some thoughts. (not pretty, but here's the link: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=68651)

9/29/2006 11:55 AM  
Blogger Center for Rural Affairs said...

And i could make a number of arguments about your assumptions that efficiency drives integration. On balance, i enjoyed your post very much, however. John Crabtree, Center for Rural Affairs.

10/22/2006 10:00 PM  

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