What is in this article?:
- Crop agriculture is clearly no stranger to change. This article examines the key forces affecting change in U.S. crop production.
- Concentration has been on a steady rise for several decades.
- Productivity increases have been significant.
- Producers are adopting larger pieces of equipment and more sophisticated technologies.
The development of the “bioeconomy” and the growing use of renewables have intensified the discussion of the complementary or competitive nature of the economic motivation of creating value and the social motivation of environmental responsiveness and sustainability. Likewise, societal concerns over the use of genetically modified organisms have shown that public opinion can significantly influence the ability of agricultural operations to utilize new technologies in crop production.
Agribusinesses that rely heavily on natural resources cannot ignore the environmental and social issues that are prevalent today. Faced with increasing government regulations and strengthening public opinions, businesses are ever more accountable for their impacts on society and more transparent in their corporate social responsibility activities. In fact, Rankin (2010) found that 68 percent of agribusiness firms surveyed were either planning or actively implementing broad sustainability initiatives.
Factors influencing Crop Production Profitability
The above drivers will significantly shape the U.S. farming sector. The potential profitability of farmers is influenced in part by the economic characteristics of the industry. These economic characteristics can, in large part, be examined using Porter’s five forces model. Porter posits that the key economic features of an industry can be identified by examining how suppliers, buyers, rivalry, substitution, and barriers to entry affect it. We use this framework to analyze the economic characteristics of crop production agriculture.
The major supplies, or inputs, for grain/oilseed producers are genetics, crop chemicals, equipment, fertilizers and land. Nonfamily labor on farms is becoming a more important input as well. However, in general, producers are able to substitute capital equipment for labor.
Input suppliers to grain/oilseed production tend to be dominated by large agribusiness firms that compete vigorously for farmer business. The substantial investment required to develop new genetics, crop protection chemicals, and automated equipment necessitates that the firms competing in this sector must achieve substantial economies of scale. The investments required to breed and engineer new crop varieties and traits require significant time and substantial costs for regulatory approval. In the short run, intellectual property rights may allow some firms to capture a significant amount of the value created by their technologies. However, the similarity of many competing seed traits and chemistries allows producers to switch products at relatively low costs, thus reducing the bargaining power of input suppliers.
Recent large price increases have drawn attention to consolidation in the fertilizer industries. In particular, the potash market has relatively few raw input suppliers. Grain/oilseed producers are subject to substantial price shocks as suppliers are able to pass cost increases in the short-term on to farmers. In the longer-term, there are alternatives that have the potential to reduce this supplier control. There is substantial potential for grain/oilseed producers to better recycle and more efficiently utilize livestock waste nutrients for crop production. However, those crop producers without access to these alternatives will likely continue to face pressure from volatile fertilizer markets.
Capital is a critical input to modern agricultural production. The U.S. capital markets are extremely efficient and competitive. This presents U.S. producers with a significant advantage over many of their foreign competitors. The establishment of the Farm Credit System was a strategic response to the competitive situation in agricultural lending. Today, agricultural credit is widely available to creditworthy producers.