The growing role of national, state, and local governments and their regulations are important drivers of economies of scale. As governments make it more difficult to comply with environmental issues, those suppliers who can overcome the barriers to entry will find advantage. Smaller companies will most likely look to be acquired by larger companies that have the regulatory expertise to comply. However, their inability or difficulty to comply easily diminishes their value as a stand-alone enterprise, and buyers will use this to bid down the values of those smaller companies.

In other instances, governmental regulations may be met, but other groups use the courts to change the rules or even take away permission to use resources. As an example, environmental groups sued the U.S. Army Corp of Engineers which had issued Mosaic a permit to mine a large track of their own phosphate deposits in central Florida. A Federal District judge granted the groups a preliminary injunction causing Mosaic’s largest and most efficient mine to sit idle until the legal issues are resolved through the judicial process. The permitting process has taken seven years, thousands of man-hours, hundreds of thousand pages of documents, and the commitment of significant reserves set aside for resource protection. The use of the courts has caused the permitting process to be more costly in terms of time, resources and concessions. Again, larger companies have the advantage and capacity to follow the permitting process to completion where smaller operations are less likely to have this capacity.

In many instances, drivers of change are coming to the input suppliers due to pressure farther down the chain, closer to the consumer. For example, concerns over the environment are causing consumers to ask, and even pressure, processors and manufacturers to change their processes and sources of raw inputs. Thus, processors put pressure on farmers to change, and the farmers, in turn, ask their suppliers for specific characteristics in inputs in order to meet demands by the farmers’ buyers.

Closing Comments

In summary, the increasing importance of the triple bottom line— economic, environment, and social—multiplied by the internationalization of the value chain and the increasing demand for food, fuel, and fiber as the population grows will put performance demands on all aspects of the value chain, including on input suppliers. These interactions increase the need for companies to manage and mitigate the increased risks of the global economy. Those suppliers who can respond to these new dynamics will be the suppliers of the future.

For More Information

Musshoff, O., Hirschauer, N., and Wassmuss, H. (2009). The Role of Bounded Rationality in Farm Financing Decisions: First Empirical Evidence. Contributed paper at the International Association of Agricultural Economists 2009 Conference, August 16-22, 2009, Beijing, China. Available online: http://purl.umn.edu/51545.

U.S. Department of Justice and the Federal Trade Commission. (2010). Horizontal Merger Guidelines. Available online: http://www.ftc.gov/os/2010/08/100819hmg.pdf.

Kent Olson (kdolson@umn.edu) is Professor, Department of Applied Economics, University of Minnesota, St. Paul, Minnesota. Michael R. Rahm (mike.rahm@mosaicco.com) is Vice President, Market and Strategic Analysis, The Mosaic Company, Plymouth, Minnesota. Michael Swanson (Michael.J.Swanson@wellsfargo.com) is Vice President and Agricultural Economist, Wells Fargo, Minneapolis, Minnesota.