Part 2 on the Farmers’ Share of the Food Dollar (see Part 1 here).
The ag value chain involves a wide array of participants to get food products from ground to grocery store–or increasingly, from research to restaurant. Every dollar spent on food has to be divided between all the different players. As the number of participants grows, and as more value is added at different stages of the value chain, the percentage of food dollar going to any one group is likely to decline.
This is why the farmers’ share of the food dollar has been on the decline for, well, pretty much the past century at least.
Sen. Elizabeth Warren and, more recently, Sen. Bernie Sanders have proposed aggressive antitrust enforcement of “Big Ag” companies—whether farm input companies like Bayer or early-stage processors like JBS or Tyson in the meat industry. The Senators claim that cracking down on these big companies will be beneficial for farmers and increasing farmers’ share of the food dollar. In my previous post, I explained why those arguments are wrong. In fact, those arguments are not even consistent with the data being used to justify the claims.
To really understand why farmers’ share of the food dollar has declined, one has to understand how—and where—value is created in the value chain. More specifically, one has to understand how value is added to the agricultural products that farmers produce. And how existing farm sector institutions work to make farmers’ share lower than it might otherwise be.
A recent (March 2019) McKinsey & Co. article titled “A Winning Growth Formula for Dairy” illustrates this value creation story. The article describes the challenge facing dairy company executives globally, and particularly in the U.S. Dairy farmers have been struggling with low raw milk prices resulting from continued over-production of milk relative to demand for dairy products. You would think large dairy companies would be bathing in profits with the cost of their primary input depressed—even below the cost of production, according to some farmer groups. And yet, return on invested capital in the dairy industry (ROIC; i.e., the economic value generated by their businesses) has been declining because growth in revenue and margins has not kept pace with an increasing cost of capital. The reason? Consumption of milk and dairy products in the U.S. has been on a long-term decline.
The authors go on to explain that dairy executives are faced with the challenge of how to create new value opportunities in the face of more milk being produced than there are uses for currently. New product development. New market development. These are expensive investments with uncertain outcomes. But that is where the value is being created for raw milk—not at the farm gate. In fact, one might argue that the value being created by dairy processors is in spite of having to overcome the value decreasing activities of dairy farms that, collectively, are overproducing.
This problem is not unique to the dairy industry. Whether corn, meat proteins, wheat, or any number of other agricultural commodities, agricultural producers are increasingly reliant on processors and refiners to transform producers’ crops into products consumers are willing (or required) to buy, and in a form consumers desire. It is not at all surprising, therefore, that more and more of the food dollar is being captured by firms beyond the farm gate. That’s where value is being added. That’s where more of the food dollar is being earned.